For many years, China operated a dual system of indirect taxes, with value added tax (VAT) applicable to the sale and importation of goods, typically at the rate of 17%. On the other hand, most services have been subject to business tax, at rates of either 3% or 5%. This dual system of indirect taxes is being reformed into a single system, with VAT to apply to all goods and services.
The reform program began in January 2012 with the introduction of a pilot program in Shanghai, replacing business tax with a VAT for a number of service sectors. The reforms are taking place because business tax is generally regarded as an inefficient turnover tax that taxes business—that is, it effectively taxes each stage of a supply chain, irrespective of the profit or “value added” by each business in that supply chain. By contrast, VAT is a tax collected by business, but effectively intended to be borne by the end-consumer.
The KPMG member firm in China has produced the 2015 edition of a guide providing an overview of the indirect tax systems in mainland China. The guide is intended to assist companies doing business in or with China to navigate the indirect tax system.
Read the 2015 indirect tax guide: China: Country VAT / Business Tax Essentials Guide 2015
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