China’s value-added tax (VAT) reform is supposed to reduce the burden on businesses through milder levies and an easier regulatory regime. While the long-awaited reform has indeed provided relief for many firms, not everyone is whooping with joy. Logistics firms, for one, are complaining that they have ended up with the short end of the stick.
Beijing expanded the tax reform pilot scheme nationwide this August, aiming to avoid double taxation and ensure a better system. Authorities hope reduced tax burden will foster investment and fuel the growth of small enterprises, which play a key role in job creation and the overall economy.
But the logistics sector, instead of gaining, is complaining that it has to pay more taxes after the reforms. Hu Genrong, head of China indirect tax practice at PricewaterhouseCoopers explained to the Economic Observer why this is happening.
The Chinese government launched in 2011 the tax reform pilot scheme for selected industries, replacing the business tax with VAT. Most of the selected sectors have indeed seen their tax liability fall, as the previous business tax was calculated on a firm’s gross revenue rather than just added value. With the success of the pilot program, authorities took the scheme nationwide this August.
Hu pointed out that for logistics companies, the applicable tax rate rises to 6-11 percent under the VAT regime from 3 percent under the business tax regime in some cases. But some key cost items are no longer tax deductible after the shift. Meanwhile, with clients gaining more bargaining power, logistics firms are not able to pass on the higher costs.
For example, oil expenses account for the largest proportion of operating costs of logistics players. Firms will receive tax deduction only if they purchase prepaid oil cards issued by energy giants such as PetroChina (00857.HK) and China Petroleum & Chemical Corp. (00386.HK).
But if they refuel at smaller gas stations in some remote areas, those stations may not issue the proper bills required by authorities for tax refund. Other costs like road tolls are non-tax deductible, too. A mid-sized logistics firm in Wuhan is said to have complained that it has to pay 1 million yuan (US$16.4 million) more in tax after the reform.
These obstacles are just the tip of an iceberg. Zhou Fei, chief financial officer of a large logistics firm told the Economic Observer that the application process for tax reduction is quite complex. Even though one has successfully applied for it, it takes up to nine months for the authorities to actually make the refund, which places a huge liquidity pressure on the companies.
Luckily for the aggrieved firms, their voices appear to have been heard. The treasury department is now reported to be considering including road tolls into the tax deductible category.
If remedial measures are taken properly, tax experts believe that the logistics sector can also benefit from the tax reform in the end.
As of October, the VAT reform has led to 93.7 billion yuan tax reduction. The figure is expected to reach 120 billion yuan at the end of the year, according to recent data from the State Administration of Taxation. Wang Jun, head of the tax authority, has revealed that the agency is preparing to extend the reform to railway transport, postal services and telecommunications industries next year.
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