The impact of the VAT reform on China’s Creative cultural services


The Ministry of Finance and the State Administration of Taxation accounted that,from 1 August 2012 until the end of the year, the VAT pilot scheme will be implemented in Beijing and seven other provinces and municipalities: Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen. According to theannouncement, Beijing is to be expected to complete the conversion by September 1, 2012. Experts suggest that this reform will not lower tax rates that have been previously paid by large enterprises.

(1) Benefits for small and medium-sized businesses

 Mr Wu, a deputy general manager of Ruosen, said that “Our Company’s taxrevenues have dropped by nearly a third under a VAT reform”.

Ruosen, which is a digital technology limited company in Beijing, is engaged in the IT service business which is subject to 5% BT and 6% VAT under the VAT Pilot Program. At first sight,Ruosen seems to pay more in taxes that it would have in the first place. But it was found that it in fact paid less tax under a VAT reform.

A AVT taxpayer is able to reclaim the VAT he or she paid on purchases, and doing so could reduce payable taxes. According to the state regulation, businesses with turnover of RMB 5 million or more must register as a general VAT tax payer, who will enjoy the right to deduct. A registered person may deduct the VAT charged on work equipment or office supplies which are used for the purposes of his or her taxable business. For example, if Ruosen’s turnover is RMB 12 million last year, the company will pay business taxes of RMB 600,000 at a rate of 5%. Although Ruosen would pay RMB 680,000 in taxes at VAT rate of 6 % under the Pilot Program, the company is entitled to the tax deduction by providing a valid VAT invoice. As a result,Ruosengot about RMB 240,000 of VAT deductions. Accordingly,the amount of VAT the company actually paid was only RMB 440,000.

(2) Not all smooth sailing

After a VAT Pilot Program started in Shanghai this year, Beijing has taken several step to speed up its tax regime. According to Cai Shui [2011]No.111, the VAT reform will be specifically applied in the transport industry and certain “modern service industries” including technology services, information technology services, culture and creativity services as well as logistics auxiliary services. By reference to culture and creativity services, it coves several specific types such as design, transfer of trademark, copyright, intellectual property related, IP agent, advertisement, and conference and exhibition.

“In order to help develop the Chinese animation industry, a lower 3% business rates had already been applied to animation products involving picture, word, music, technical production,ect. We initially worried that such an existing preferential tax policies would no longer be available after a VAT pilot reform was to be implemented .But there is no need to worry too much about this issue right now as the adjustment on tax policy will continue to support the animation industry. In other words, less tax and taxation of both VAT and business tax will be made hereby.” Ms Sun said

Some doubts that tax preferential policy mentioned above can not relieve the stress on animation enterprises. Even if ananimation company could be able to save as much as RMB 200,000 per year by paying for reduced tax rates, it has been questioned that how helpful it wouldbe for animation enterprises to enjoy lower tax rates

Responding to above criticism, Wu Zhen pointed out that “the tax reductions effected by means of the VAT should help smaller firms in the Chinese services sector that have been greatly affected recently by increased costs and restricted credit.” Meanwhile, Wu Zhen suggests that the government should give more details about the new tax policy and put it into practice as soon as possible.

(3) Reality check

Shifting from business tax to VAT has lessened most tax payers’ burden in cultural enterprises. However, Liu Tianyong said that the VAT tax reform does not exactly mean that this will be full tax cuts for cultural enterprises. In fact, large sized enterprises will possibly even pay more than it had previously, while the average tax burden of small scale taxpayers was slashed .

In addition,the pilot program might enable a customer of a Pilot Industry taxpayer to credit input VAT incurred on the purchase of services or goods. But the service company such as creative and cultural businesses cannot deduct the tax cost of the purchase of materials. This puts the service company in a disadvantageous tax position, as part of its expenses are double-taxed.

Moreover,as the pilot currently limited to one city, for larger companies and businesses, they may have a difficult management issue because they are paying one sort of taxes in one city and another set of taxes in other cities. Unfortunately, this may eventually result in a higher tax bill. For example, if a customer is a BT taxpayer outside the Pilot Program who cannot deduct input VAT, its tax burden may increase if it receives services provided by taxpayers in the Pilot Program.

Although all experiments come with problems, Liu Tianyong believes that such a move will boost China’s taxation system reform.