Opinion: VAT goes nationwide

At the beginning of the year, in a widely publicised move by the PRC government, Shanghai was chosen to launch the Value Added Tax (VAT) Pilot Programme. Six months later, on July 25, the Programme was extended to other areas including: Anhui, Beijing, Fujian, Guangdong, Hubei, Jiangsu, Ningbo, Shenzhen, Tianjin, Xiamen and Zhejiang. Then on October 18, Li Keqiang, the likely candidate to be the next prime minister, held a meeting announcing his decision to extend the Programme to new jurisdictions and industries. Mail, telecommunications, railway and construction were the industries to be targeted. The unification of VAT and Business Tax (BT) is expected to be completed during the 12th Five-year Plan.

Shanghai as a tax magnet?

The purpose of the Programme is to resolve double taxation, which occurs under the current regime of both VAT and BT. Considering the long term goals, if implementation was restricted to Shanghai, the effects would not only be limited but also negative. If Shanghai became a tax haven, an increasing number of VAT taxpayers would purchase from Shanghai, allowing them to offset their output VAT. In addition, some BT taxpayers would relocate their business to Shanghai, allowing them to have their output VAT deducted from the input VAT received from sellers. Essentially, the economic balance between Shanghai and other areas would be broken, devastating certain industries in other jurisdictions.