November 11, 2008 Press Office of the Ministry of Finance (MOF)
Recently, the State Council's executive meeting approved the VAT transformation reform plan submitted by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT), and decided to implement the VAT transformation reform nationwide from January 1, 2009 onwards. The persons in charge of the Ministry of Finance and the State Administration of Taxation (SAT) answered reporters' questions on issues related to the VAT transformation reform.
Q: What is the significance of launching the VAT transformation reform in the current economic situation to maintain the stable and rapid development of China's economy?
A: The VAT transformation reform, which allows enterprises to offset the VAT contained in their purchased equipment, will eliminate the double taxation factors arising from China's current production-based VAT system, reduce the tax burden of enterprises' investment in equipment, and is a major tax-cutting policy under the premise of maintaining the current tax rate unchanged. As it can avoid double taxation on enterprise equipment acquisition, it is conducive to encouraging investment and expanding domestic demand, and promoting technological progress of enterprises, industrial structure adjustment and transformation of economic growth mode. At present, the financial crisis triggered by the U.S. subprime crisis has spread to Europe, Asia and Latin America, and the global economic growth has slowed down significantly, with some countries even showing signs of recession, and the financial crisis is having a significant adverse impact on the real economy. Under this situation, the timely introduction of VAT transformation reform is very important for enhancing the development of enterprises, improving the competitiveness and risk-resistant ability of Chinese enterprises, and overcoming the negative impact of the international financial crisis on China's economy. It is estimated that this reform is expected to reduce revenue by more than 120 billion yuan, which is the largest tax cut in China's history for a single tax reform, and it is believed that the introduction of this policy will have a positive impact on the sustained, stable and rapid development of China's economy.
Q: What is the significance of the VAT transition reform for improving the VAT system?
A: One of the major advantages of the VAT system is that it can avoid the problem of double taxation in the process of production specialization. According to the different ways of deducting the tax included in the purchased fixed assets, the VAT system is divided into three types: production type, income type and consumption type. The production type does not allow the deduction of levied VAT contained in purchased fixed assets, and the tax base is equal to the GNP, which is the largest but also the most serious in terms of double taxation. The income type allows the deduction of VAT on current depreciation of fixed assets and has a tax base equivalent to national income, which is the second largest tax base. Consumption-based allows a one-time deduction of VAT on purchased fixed assets, and the tax base is equivalent to final consumption, which is the smallest tax base but also the most thorough in eliminating double taxation. Among the more than 140 countries in the world where VAT is currently practiced, the vast majority of them are practicing consumption-based VAT.
In 1994, China chose to adopt the production-based VAT, on the one hand, for the consideration of fiscal revenue, and on the other hand, in order to curb investment inflation. With the gradual improvement of China's socialist market economic system and the deepening development of economic globalization, the necessity of pushing forward the transformational reform of VAT has become more and more prominent.
The Third Plenary Session of the Sixteenth Central Committee of the CPC clearly put forward the timely implementation of this reform, and the Eleventh Five-Year Plan made it clear that the reform would be completed during the Eleventh Five-Year Plan period. Since July 1, 2004, in the northeast, central and other parts of the reform has been implemented in some areas of the pilot, the pilot work has been running smoothly, and reached the expected goal. 2008 the State Council Government Work Report proposed to study and formulate a national value-added tax transition reform program. The report of the Financial and Economic Committee of the National People's Congress on the results of the examination of the draft budget, which was considered and agreed by the First Session of the Eleventh National People's Congress, explicitly proposed to strive for a nationwide VAT transformation reform in 2009. Under such circumstances, the State Council decided to implement the VAT transformation reform to standardize and improve China's VAT system, to make the tax system more in line with the requirements of the scientific outlook on development, and to create conditions for the eventual improvement of the VAT system and the fulfillment of the task of formulating a VAT law within five years as requested by the Standing Committee of the National People's Congress (NPC).
Q: What are the main contents of the VAT transformation reform program?
A: The main contents of this VAT Transformation Reform Program are: Starting from January 1, 2009, under the premise of maintaining the current VAT rate unchanged, all general VAT payers nationwide (regardless of regions and industries) are allowed to offset the input tax contained in their newly purchased equipment, and the unoffered input tax will be carried forward to continue to be offset in the next period. In order to prevent tax loopholes, cars, motorcycles and yachts, which have nothing to do with technological upgrading of enterprises and are easily mixed with personal consumption subject to consumption tax, are excluded from the scope of the above equipment. Meanwhile, as supporting measures for the transformation reform, the VAT exemption policy for imported equipment and the VAT refund policy for foreign-invested enterprises purchasing domestically produced equipment will be canceled accordingly, the levy rate for small-sized taxpayers will be uniformly lowered to 3 percent, and the VAT rate for mineral products will be restored to 17 percent.
Q: What is the situation of the pilot of the VAT transformation reform in localized areas such as Northeast and Central China? What is the difference between this transformational reform program and the pilot approach?
A: According to the deployment of the State Council, starting from July 1, 2004, the transition pilot was first carried out in eight industries, such as equipment manufacturing industry and petrochemical industry in the three northeastern provinces; starting from July 1, 2007, the scope of the pilot was expanded to eight industries, such as electric power industry and extractive industry, in the 26 cities of the old industrial bases in the six central provinces; and, on July 1, 2008, the scope of the pilot was expanded again to On July 1, 2008, the scope of the pilot program was extended to five cities in the eastern part of the Inner Mongolia Autonomous Region and the Wenchuan earthquake-affected areas in Sichuan. In addition to the Wenchuan earthquake-affected areas in Sichuan, the main content of the pilot scheme implemented in the other pilot areas is: the input tax contained in the newly purchased equipment of the enterprises will be offset against the outstanding VAT first, and then be offset against the new VAT of the enterprises in the current year, and the balance of the unoffset input tax will be carried forward to the next period to continue to be offset.
According to statistics, by the end of 2007, the total input tax of new equipment in the pilot areas of transition in the northeast and central China amounted to 24.4 billion yuan, and the cumulative offsetting of outstanding VAT and refunding of VAT to enterprises amounted to 18.6 billion yuan. The pilot work has been running smoothly, vigorously promoting economic development, equipment renewal and technological transformation in the pilot regions, and also accumulating rich experience for the full-scale VAT transformation reform.
Compared with the pilot scheme, the national VAT transformation reform program has been adjusted in three aspects: First, the input tax contained in newly purchased equipment is no longer refundable, but a standardized offsetting method is adopted, and enterprises purchasing equipment and raw materials, like the normal method, can directly offset their input tax; second, the transformation reform is pushed through in all regions of the country, and regional and industrial restrictions are canceled; Thirdly, in order to ensure the positive effect of the VAT transformation reform on expanding domestic demand, enterprises are no longer restricted by whether there is any incremental VAT payable on them when offsetting the input tax of equipment after the transformation reform.
Q: What are the fixed assets included in the scope of deduction? Can real estate such as houses and buildings be allowed to be included in the scope of deduction?
A: Fixed assets in the scope of current VAT are mainly machines, machinery, transportation tools and other equipment, tools and apparatus related to production and operation, therefore, the fixed assets allowed to be deducted after the transformation reform are still in the above scope. Real estate such as houses and buildings cannot be included in the scope of VAT deduction.
Q: Why does this reform cancel the tax exemption policy on imported equipment and the VAT refund policy on the purchase of domestic equipment by foreign-invested enterprises accordingly?
A: The VAT exemption policy on imported equipment to be canceled in this reform mainly refers to the VAT exemption policy stipulated in the Circular of the State Council on Adjustment of Taxation Policy on Imported Equipment (Guo Fa [1997] No. 37) and the Circular of the General Office of the State Council on the Transmission of the Opinions of Foreign Economic and Trade Departments on the Current Further Encouragement of Foreign Investments (Guo Baifa [1999] No. 73). These policies were introduced against the background of the implementation of production-based VAT in China, mainly to encourage the relevant industries to expand the utilization of foreign investment and introduce advanced foreign technologies. However, some problems have been reflected in their implementation, mainly as follows: firstly, the scope of imported tax-exempted equipments is wider, which is not conducive to independent innovation, localization of equipments and revitalization of China's equipment manufacturing industry; secondly, the scope of tax exemption for imported equipments of domestic enterprises is smaller than that of foreign-funded enterprises, which is unfair in terms of tax burden. After the transformation and reform, enterprises to buy equipment, whether imported or domestic, its input tax can be deductible, the original policy has been able to replace the new way, the original necessity of tax exemption for imported equipment has ceased to exist, this policy should be discontinued.
The VAT refund policy for foreign-invested enterprises purchasing domestically produced equipment was also introduced in the context of production-based VAT and VAT exemption for imported equipment. Since this part of the equipment is just as deductible after the transformation reform, the VAT refund policy on the procurement of domestically produced equipment by foreign-invested enterprises has ceased to be implemented accordingly.
Q: What are the considerations for restoring the VAT rate for metallic and non-metallic mineral processing products from 13 percent to 17 percent?
A: In 1994, when the tax reform, some mineral products were still subject to planned prices and planned allocation, and there were many historical problems, so with the approval of the State Council, the tax rate of metallic and non-metallic mineral processing products was adjusted from 17% to 13% in May 1994 onwards. This policy has played a certain role in the stabilization and development of the extractive industry, but there are some problems, mainly: firstly, the application of low tax rate on non-renewable mineral resources is not in line with the requirements of resource conservation and environmental protection; secondly, it reduces the tax revenue of the place where the resources are mined, and undermines the ability of the place where the resources are mined to provide the public *** products; thirdly, the mineral resources are basically used as the raw materials, and the mining enterprises underpay the VAT due to the next link to reduce the input tax amount and make up for the levy back, the policy effect is not obvious; fourth is to lead to the levy and payment of both sides to such a low tax rate applicable to the division of goods and other goods, increasing the cost of levying and paying taxes.
After the transformation reform, the outsourced equipment of mining enterprises will be included in the scope of input tax credit, and the overall tax burden will be reduced. In order to fair the tax burden, standardize the tax system, and promote the saving and comprehensive utilization of resources, it is necessary to restore the value-added tax rate to 17% for metallic and non-metallic mineral mining and processing products.
After raising the VAT rate of mineral products, the VAT contained in the final products will not increase or decrease in total amount due to the corresponding increase of input tax deductible in the next link, only that the tax burden will be shifted to a certain extent between the upper and lower links, and the fiscal revenue will not be increased or decreased in total amount as a result of this.
Q: What are the specific measures for the development of small and medium-sized enterprises in this reform?
A: The target of applying the transformation reform is the general VAT taxpayers, and the VAT burden of these taxpayers will generally decrease after the reform, while the VAT burden of the small-scale taxpayers (including individual industrial and commercial enterprises), which are small in scale and have unsound financial accounting, will not be reduced due to the transformation reform, as they are required to pay the VAT according to the sales amount and the levy rate and do not deduct the input tax amount.
The current policy stipulates that small-scale taxpayers are subject to a levy rate of 6 percent and 4 percent for industrial and commercial categories, respectively. Therefore, in order to balance the level of tax burden between small-scale taxpayers and general taxpayers, and to promote the development of small and medium-sized enterprises and the expansion of employment, it is necessary to reduce the levy rate for small-scale taxpayers accordingly. Considering that the mixed business operation of small-scale taxpayers is very common in the real economic activities, and it is difficult to clearly divide the industrial and commercial small-scale taxpayers in the actual collection and management, the small-scale taxpayers will no longer be distinguished between the industrial and commercial setting of two levels of levy rate, and the levy rate of small-scale taxpayers will be uniformly lowered to 3%.
The substantial reduction in the level of small-scale taxpayers' levy rate will reduce the tax burden of small and medium-sized enterprises (SMEs) and provide them with a more favorable environment for development. In addition, the Ministry of Finance and the State Administration of Taxation will further encourage the development of small and medium-sized enterprises by raising the starting point of value-added tax and business tax.