Value-added reform

Shanghai companies welcome a new form of stimulus

Value-added reform

Not so bankable: Lin Chunping

Earlier this year, Wenzhou entrepreneur Lin Chunping announced the purchase of Atlantic Bank of America. The acquisition caused a stir, not least because the deal would have made him the first Chinese businessman to purchase a US bank. Lin was also planning a bold rebranding and he said his intention was to change the company’s name to USA New HSBC Federation Consortium.

There were various problems with Lin’s grand plan (the use of the HSBC name being a big one) but perhaps the most glaring of all was that the Atlantic Bank did not actually exist.

This was exposed by People’s Daily Online in March which made plain that Lin’s deal was an elaborate hoax. Fresh from that PR disaster the Wenzhou entrepreneur is back in the news again – this time for tax fraud, reports CBN.

Lin is suspected of forging value-added tax (VAT) receipts worth nearly Rmb100 million so that he could claim export rebates and other tax benefits. He subsequently absconded and the police are searching for him.

Lin’s case is topical – given that VAT is very much on the policy agenda. That’s thanks to a pilot scheme in Shanghai, where VAT has replaced a turnover tax for companies in transportation and other service sectors.

It may seems bland, but it has acted as a stimulus for local companies. Unlike the turnover tax – which is charged on a company’s revenue regardless of its costs – VAT can have costs for fuel and equipment deducted.

Hence the shift away from taxing gross revenues is supposed to lighten the burden faced by small and medium-sized businesses, especially those who have previously had to pay turnover tax rather than VAT.

In May, Shanghai’s tax department announced that the total tax burden for the 129,000 companies involved in the pilot was reduced by Rmb2 billion ($257 million) in the first quarter, reports the Economic Observer.

The newspaper gives the example of an advertising company that saw its first quarter turnover rise 10%, but thanks to the new VAT scheme paid only 3% more in tax.

It’s been so successful, the Shanghai government is also pushing for an expanded scheme within the city, to include sectors such as construction, finance, and telecoms.

Why lobby for a scheme that reduces tax revenues? One reason could be that businesses are said to be moving into the city from areas near Shanghai in order to benefit from the new tax regime.

For instance, the Economic Observer spoke to the chief financial officer of an international freight business that recently switched from Wuxi. He told the newspaper that the company was now more competitive because of the new regulations.

Officials in provinces bordering the city are less impressed, of course. Not surprisingly they feel the new tax regime gives the city an unfair advantage in attracting businesses. “A company looking for suppliers in the Yangtze River Delta will make Shanghai the first choice,” one tax official said, “because in Shanghai they can issue a VAT invoice.” (VAT receipts can be deducted from the firm’s costs, a saving that means less corporate tax is paid at the end of the fiscal year.)

In order to keep up with Shanghai, other cities and provinces have applied to join the pilot scheme, including Jiangsu, the next door province. Somewhat further north, the first successful applicant is Beijing, which was approved for a similar trial in late May. This could create competition with other business centres near the capital, most notably Tianjin.

For others, the sooner the pilot scheme is expanded across the whole country, the better.

The trial scheme “is unfair for non-pilot areas,” Ni Hong, a researcher at the State Council Development Research Centre told the Economic Observer. “Failure to make it spread quickly throughout the country is a departure from the intention of VAT.”

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