The value-added tax (VAT) rebate system for exporters in China will be revamped from January 1, 2004 with reductions in many rebates, one of a number of efforts by the government to lower international pressure over the valuation of the RMB. But in many cases, the rebates being reduced have not actually been paid.
The VAT rebate policy – essentially an incentive for manufacturers who export under which a portion of their tax payments are returned to them – has been instrumental in attracting foreign companies to set up shop in China since the mid-1980s, and especially since it was expanded during the Asian financial crisis in 1998. But the rebate payments are in some cases over a year late.
Unpaid rebates now total more than RMB 300 billion, according to China-based accounting firm LehmanBrown. This, combined with rising international pressure over what many consider to be China's undervalued currency, led the Ministry of Finance and the State Administration of Taxation (SAT) to announce in October that there would be a reduction in VAT tax rebates for export companies.
The VAT rebates for exported goods will fall by an average of three percentage points but the effect will be different for different industries as the government seeks to encourage some exports and discourage others.
The rebate reduction is expected to have the biggest impact on exporters who source raw materials domestically because the VAT they pay on domestic products will be increasingly greater than what they claim through export rebates. Worst hit will be anyone dealing with natural resources or goods that are in short supply in China. VAT rebates for natural resource products such as pulp, oil and lumber have been cancelled altogether.
The impact from the new policy will be minimal on firms that import raw materials and then export their finished goods as they will continue to enjoy high VAT exemptions. For export goods that are encouraged by the government, the tax rebate will remain mostly unchanged. This includes VAT rebates for cars and car accessory exports, which will remain as high as 17 percent.
For ordinary consumer goods, tax rebates will be cut substantially. Consumer goods such as garments, knitted thread and accessories will drop from 17 percent to 13 percent.