What will the changes mean for small businesses?
Chen Xuebing is a professional costume designer for movie and TV dramas. Chen started his business in eastern Beijing seven months ago, dressing common people in traditional Chinese styles, with costumes and decorations made for those popular hits.
Being treated like a star is one of the drivers for Chen's business. Another incentive, with tangible benefits, is the lowered tax costs. From May, Chen's studio, which is in the consumer service sector, will be eligible to pay value added taxes, instead of business taxes.
"The influence is rather significant. I am a small-scale taxpayer. In the past, we needed to pay a 5.5 percent business tax out of our sales. Now we only need to pay three percent of our revenues as a value added tax. For a newly founded firm, this is quite good," said Chen Xuebing, Cosmovie Service founder.
Tax experts say that compared to other sectors included in the VAT scheme, consumer services has its own edge to gain from the tax change.
"Probably with the consumer services sector, with their relatively simple operational model and shorter transaction cycle. That sector may see benefits sooner than the other three sectors," said Alan Wu, indirect tax leader of PWC China.
And the benefits may be enlarged.
GFX IN There are two types of VAT taxpayers. Small businesses and general businesses, separated by the five million yuan in annual sales.
Start-up businesses pay three percent of the VAT out of their revenues, with no tax credits. When they grow larger and qualify as general businesses, they would have to pay six percent VAT, but with more tax deductions. The costs of services, goods, and utilities could all be counted in.
"It allowed the VAT paid at one stage to be taken as an input VAT credit in the next stage. This is the element of VAT. If a taxpayer could pass on the output VAT and claim the input credit, then eventually, they will have zero VAT burden," Wu said.
Chen is expecting to make full use of the tax credit.
"Certain services would be contracted to third parties, such as make-up schools, props, costume factories, and so on. For me, it would cut my labor costs, and the deductibles would help further slash my tax expenses, which may be even less than the three percent I am paying," Chen said.
