From Business Tax to VAT in the telecommunications sector

At the end of April, the Ministry of Finance and State Administration of Taxation jointly issued a circular that confirmed the replacement of the Business Tax (BT) by the Value-Added Tax (VAT) in the telecommunications sector.

This transition has very little time to be implemented, as the VAT is supposed to be applied as soon as the 1st of June. With this short time frame comes two other new issues to be taken into account : first, the fact that the BT system was narrower than the new VATT systems, meaning that more taxpayers will be concerned by the taxation system (and including the foreign operators this time). Secondly, the VAT system will now affect new forms of telecommunications service providers such as the digitized services industry.

The current 3% BT ratio will be replaced by two different VAT ratio applying to two types of telecommunications. First, the Basic telecommunications services – voice communication by phones or internet and network activities – will be subject to an 11% VAT. Then, the Value-added telecommunications services – text messages and multimedia messages by phones or internet, transmission of electronic data, internet access services and satellite TV – will be subject to a 6 % VAT.

The reason for such a difference is that basic telecommunications services require more significant infrastructures and more investment for capital equipment. Thus, the providers can benefit comparatively more from being eligible to claim input VAT as compared to their investment costs.

We cannot know for now whether this will in higher prices for consumers, as the telecommunications sector in China is subject to regulated pricing.