China Real Estate Sector Closes on First Month Under VAT

For Chinese property developers, this week marks the closing of the first month under a new tax system that could either bring a reduction in costs, or new bureaucratic headaches to the industry.

The value-added tax (VAT) was rolled out on May 1 to replace the former business tax system, with the real estate sector joining a list of other businesses including finance and services which will now be taxed on the value they add to products or services, after previously being levied on their revenue. Under the new system, businesses will see an estimated $76.9 billion in taxes reduced this year alone, according to official estimates.

Lowering Taxes to Jumpstart Business

The tax overhaul is the brainchild of top leaders in Beijing as they turn to fiscal tools to manage the slowest growth in a quarter century.

“We must see that the replacement of business tax by VAT is a tax reform that will grant benefits to (businesses),” Chinese premier Li Keqiang told a state council meeting in Beijing in January.

For most real estate businesses, their sales will now be taxed at 11 percent, but the system allows for deduction of  land costs as well as tax refunds.

China’s property market is expected to see a lift from the tax changes, said Qiao Yulong, a reporter at a local property website. “This tax change will encourage companies to buy property because they will be able to deduct the expenditure from their taxes,” Qiao noted.

Yan Yuejin, a property analyst at Shanghai-based E-house China R&D Institute, said the new tax regime would speed up land deals in some cities as developers act on the tax deduction on land costs to start new projects.

New Rules Could Cause a Pause

Some analysts, however, are wary of the complexity of the tax changes and said it’s premature to declare the tax overhaul a victory.

“The VAT reform has different effects on companies depending on their size. Some property research institutes have done studies that show that property companies with a gross profit over 56 percent will not see a huge benefit; some will see their tax increase even, whereas the VAT system will largely benefit smaller property companies. ” said Ye Tan, an independent economist based in Shanghai.

Complicating things further, she said, is the fact that many suppliers of property developers are not able to issue VAT receipts, hence making deduction impossible, she added.

In an official nod to the complexity of the new tax regime, Wang Jun, head of the State Administration of Taxation said the implementation of VAT is “ all-encompassing, very complicated and unprecedentedly difficult.” He did not elaborate.