Value Added Tax and GDP of China Samples †MyAssignmenthelp.com

Question: Discuss about the Value Added Tax and GDP of China. Answer: Introduction It happened for the first time in the year 2015 that services contributed to more than half of the gross domestic products or GDP of China. The field of services have been growing at an alarming rate and that rate is higher than all other sectors of the present economy. The government of China visualizes reformations in the value added tax or VAT to motivate growth in the consumptions and services as the country moves away from the industries that are low-value added. VAT is introduced mainly to motivate the low-end manufacturers in upgrading their capabilities and technologies. It also aims to motivate the industries to put money into the fields of development and research so that they can move higher up in the value chains. The system of VAT is existent in China since the times when the state underwent some bold reforms and introduced itself to the world economy in the year 1979. The Chinese tax system went through major renovations in the year 1994. During these times, the VAT system was remodeled to include the services related to repairs and processing and those related to the sale of goods. This helped in generating more revenue for the central government. It is expected that in 2016 the tax payments would be reduced by a total amount of RMB 500 billion, an equivalent of 77 million USD, due to these expansions of the VAT. The current phase of the reforms on VAT were introduced as an experimental project in Shanghai in the year 2012. These reforms incorporated some industries dealing with modern services and transportation. This was later expanded to eight different locations in the same year and later throughout the nation o the 1st of August, 2013. By the end of 2015, all industries and services of the country were brought under the scheme of VAT. Caishui [2016] No. 36 (Circular 36) issued jointly by the ministry of finance and the state administration of taxation on March 23, 2016 stated that the major industries that had been paying business tax or BT would be converted to the VAT regime. Circular 36 made sure that BT was completely replaced by the VAT thereby ending the dual existence of BT and VAT mechanisms in China. It is surely one of the major landmark reforms in the indirect tax history of China. The VAT regime of China has been further clarified as a part of the efforts on the part of the government to deduce 55.2 billion USD from taxes. The state Administration of Taxation or SAT of China has further clarified the four-tier system of VAT to a three tier system. The 13 percent bracket has been removed from the earlier system. Tax Scope According to Circular 36, VAT payers are defined as individuals and entities selling services, real estate and intangible assets within China. Two categories have been newly introduced. They are the category of supplies of intangible assets and the category of the supplies of real estate. All the core categories can be subdivided in order to define the services covered within the core category. The category dealing with the supplies of services can be further divided into seven sub-categories. It is the core category that includes the new services: Postal services Transportation services Construction services Telecommunication services Lifestyle services Financial services Modern services The services pertaining to construction, lifestyle and finance are the three subcategories that have been recently introduced. Items exempted from the scope of VAT Income from the interest of deposits derived by the financial institutions, the claims that hare paid by the insurers and specific acquisition and merger activities are exempted from the scope of VAT. Tax rates The standard rate for VAT is 17 percent for the general tax payers. This rate is applied to the importation and sale of goods, repair provisions, processing and replacement services. It also covers the lease of movable, tangible assets. The main examples of reduced rates, exemptions and zero rates are as follows: 3% - small-scale taxpayers are those who own businesses that are not sophisticated, do not have proper systems for auditing and accounting systems. The turnover of these businesses remain between the ranges of RMB 500,000 to RMB 5,000,000. This range is selected for the businesses that have been recently converted from the BT system to the VAT system. These taxpayers cannot claim the input credits on purchases but have to pay the output VAT. This rate may be applied to some construction services as well. 6% - modern services refer to the technical and research and development services, creative and cultural services, information technology services, consulting and certification services, logistics and ancillary services, services belonging to radio, television and films, value added telecommunication services, insurance and financial services and services related to lifestyle. The life style services include health care, accommodation, education, travel, food and beverage, entertainment sports and cultural services and the daily services of the citizens. 11% -services related to transportation, basic telecommunications, construction and real estate. It further includes the sale of vegetable oils and food grains, air conditioning, heating, some gas supplies, newspapers books and magazines. Zero-rated exported items, some exported services. Unlike other countries the refund provided for these items in China are in most cases lower than the incurred amount of VAT Exempt contraceptive devices and drugs, agricultural products, antique books and some exported services. Influence Earlier, many services were included in the BT scheme and manufacturing and industrial firms were included in the VAT scheme. This resulted in the services industries paying higher taxes due to them facing taxes based on revenue getting accumulated across the chains of supply whereas they did not benefit from the deductions that were allowed by the scheme of VAT. The latest reform allows the service industries to enjoy the tax rates that have been reduced generally. These industries are taxed on the value added at each transaction point, for example, the difference between the wholesale and retail prices of a product. In such cases, the input VAT must be deducted from the output VAT. Although the reform mainly plans to lessen the tax burdens in the corporate sector there have always been gainers and losers in all types of changes. The construction and real estate industries, for example, are closely entwined. The real estate industries benefit more from the VAT reforms than the construction ones. The developers may receive VAT input credits for purchasing land use rights and thus only pay the taxes for the value that they do add to the property. On the contrary, construction industries have lesser opportunities to claim the VAT credits. This is due to the fact that the labor costs cannot be deducted and the raw materials are considered not to add values to the property.