China's VAT Reduction Will Cover Broad Scope, Take Effect April 1

China’s reduction in value-added-tax rates will cover a broad scope of Chinese imports and will officially take effect April 1, according to a March 22 press release from China’s State Council. Taxpayers that are subject to the 16 percent VAT rate will see a drop to 13 percent, according to the release, while those subject to the 10 percent VAT rate will see a drop to 9 percent. In addition, the VAT rate for agricultural products will drop from 10 percent to 9 percent. The VAT changes also include an “extension in the scale of goods and services eligible for input tax deductions,” the release said.

The changes were first announced by China’s Premier Li Keqiang during the opening of the county's annual meeting of its National People's Congress on March 5 (see 1903050056). According to a March 5 projection from KPMG, the rate reductions will also come with certain “preferential treatments,” including “an increase to the credits to manufacturers and lifestyle related service providers.” Other products covered under a 6 percent VAT rate, including “financial services” and “lifestyle services,” will remain at 6 percent, KPMG said.

China previously decreased a broad range of VAT rates in 2018, making this round of changes a sign of progress that shows the Chinese government’s “willingness to implement further VAT reductions,” said Kyle Freeman, a Chinese business advisory manager with Dezan Shira & Associates. “This round of VAT reductions are promising,” Freeman said in an email, calling the changes a “significant reduction which surpassed conservative estimates of what the government might have introduced in this round.” Freeman said the 3 percentage point reduction in the top-tier VAT rate “applies to most goods,” reducing tax burdens on companies and keeping prices of Chinese goods competitive. Freeman it “should help to reduce costs for companies importing or sourcing from China.”

Johnny Xie, an accredited World Customs Organization trainer and international trade and customs affairs expert with China-based Questoud, said lowering the VAT rates will particularly help China’s manufacturing sector, which he said “is also a primary issue of China-US trade war.” Xie said the Chinese government will wait to review the impacts of the VAT reductions before taking more steps. “If it works well by boosting or sustaining China’s development, further incentives may be injected,” he said in an email. Freeman agreed, saying “the government has indicated willingness to explore combining the current three levels of VAT rates into two levels, so we could expect possible further reductions in VAT rates in the future.”