China expands VAT to telecom sector

BEIJING - China is to replace turnover tax with value-added tax (VAT) in the telecom sector, following similar changes in transport and some service sectors.

The new rules become effective on June 1, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) announced on Wednesday.

Basic telecom services such as voice calls and bandwidth leasing or sales will be subject to 11 percent VAT while value-added services such as messaging, data transfer and Internet access will be subject to a 6 percent rate. Telecom services for overseas clients will be exempt.

The MOF's Liu Shangxi said that VAT creates a fairer market environment. China has been pushing VAT reform since the beginning of 2012. The reform started with transportation and some modern service sectors, and expanded to railway transportation and postal service sectors before it was introduced in the telecom industry.

As of the end of March this year, the VAT reform has covered nearly 3 million businesses and saved them 220 billion yuan (35.5 billion U.S. dollars), according to SAT. The changes help avoid double taxation and eliminate distortions in tax policies, said Hu Yijian of Shanghai University of Finance and Economics.

SAT is working on plans to expand VAT to more sectors, including construction, real estate and service sectors that meet people's daily needs, such as catering, hairdressing and photography. The administration has a goal of expanding VAT to all merchandise and services by the end of 2015.

Turnover tax refers to a tax on the gross revenue of a business, while a VAT refers to a tax levied on the difference between a commodity's price before taxes and its cost of production.