China's Reduction of VAT Rates May Have Broad Scope

China will lower its value-added-tax rates on certain goods and services from 16 percent to 13 percent and from 10 percent to 9 percent, China's Premier Li Keqiang said during the opening of the county's annual meeting of its National People's Congress on March 5, according to multiple reports. While Li said the new 13 percent VAT will apply to manufacturing and the 9 percent will apply to transportation and construction, KPMG projects the scope of the rate changes to broad, with the 13 percent rate applying to all Chinese imports. Li did not announce when the new rates will take effect, although they are expected this year.

KPMG’s projection is partly based on precedent: China decreased a broad range of VAT rates after making a similar announcement in March 2018. KPMG's report also states that “it is difficult to see how such rate reductions could be ring-fenced to particular stages of economic activity,” and that "if the objective is to stimulate economic activity amongst consumers, then any rate reduction needs to flow through to the retail sector. For these reasons,” the report said, “we anticipate that the rate reductions will apply more broadly.”

In addition to VATs on imports decreasing from 16 percent to 13 percent, the report estimates that “transportation services, sales and leases of immovable property, basic telecommunications services, construction services, postal services, agricultural products and water and gas supplies” will see a reduction from 10 percent to 9 percent. Other products covered under a 6 percent VAT rate, including “financial services” and “lifestyle services,” will remain at 6 percent, the report said.

The rate reductions also come with certain “preferential treatments,” according to the report, including “an increase to the credits to manufacturers and lifestyle related service providers.”

The move will likely help boost private-sector profits during a time of increasing economic tension as the U.S. and China negotiate a trade deal. A 3 percentage-point cut to VAT in the manufacturing sector could be worth up to $90 billion, according to a Morgan Stanley estimate cited in a Bloomberg report.

Thomas Ha, a partner with G&M Compliance, said in an email that the rate reductions will likely “help lower the gross price” of certain products. “Depending on how the trade negotiations between U.S. and China ends up,” Ha said, “it will certainly impact the VAT rates as well.”