It's been a month since China's State Council announced a pilot program in Shanghai, to expand the scope of the Value Added Tax to cover industries that are currently subject to business tax. Let’s take a look at how tax experts and companies have been responding.

Under China’s current indirect tax system, value added tax or VAT is only levied on the supply of goods, repair services, processing and replacement services, and on imports. The Business Tax is levied on the provision of any other services. Under the new pilot program, starting next year Shanghai companies in information technology, logistics, property leasing, and consulting will pay the VAT in place of the Business Tax. But in fact, experts say most other countries combine the VAT and the BT together in one unified tax.

Robert Smith from Ernst & Yong, Asia Pacific said:　"Most that run a typical VAT system have already joined together services and goods into the VAT. Most of Europe, say the UK, you can really go to France, you can go to Germany. You can say all of those countries, most of them have put together goods and services together. If you look here around Asia, you can say Australia, or New Zealand or Korea. These countries also have really goods and service already together in their VAT system. "

For companies affected, their top concern is whether the pilot program will lower or raise their tax burden. On the one hand, the new VAT will be based only on a company’s profits, not on all revenue as with the Business Tax. That may sound good, but the new VAT tax rates will be higher -- 6%, 11%, 13% and 17%, while business tax rates will remain at the current lower 3% and 5%. Some companies are worried that the experiment with reform could actually end up costing them more.

Financial manager Chen Zhongwei from Shanghai Asian Development International Transportation said: "By looking at the rate, I think it’s a significant increase. Currently the BT rate for transportation services is at 3%, and it is going to be raised to 11%. And for delivery services, from the current 5% to 6%. So it’s obviously a tax increase. "

Concerns aside, the trial starts January 1st, 2012. If it is successful and conditions are suitable, the scheme will be extended nationwide. Shanghai is also considering expanding the value-added tax system to industries such as financial services if the trial goes well.

Source:cntv.cn