Loading
Dilemma for Tax Reform in Construction Industry & 6% Tax Rate Advised
Source:未知 Time：2014-03-21 11:24 Core Prelude: Piloting of value-added tax to replace sales tax in construction industry will be implemented no late that 2015, but people hold negative opinion on the outcome of this tax reform. During 2 Congresses just concluded, people in this industry put forward a tax rate of 6% for construction industry.
As tax reform deepens, previous sales tax system must be replaced by value-added tax in construction industry. On January 1st of this year, transformation of sales tax into value-add tax has been piloted for railway transportation and post service industries. Last year, at the 3rd China Construction Enterprise Professional Manager’s Annual Conference, an officer from Ministry of Housing and Urban-Rural Development of the PRC anticipated that tax reform for construction industry would be implemented no later than 2015.
This round of tax reform (sales tax replaced by value-added tax) is designed to lessen the tax burden borne by enterprises, but after deliberate study and calculation, practitioners in this industry found that tax levied on enterprise would be increased instead. The big difference discloses that income tax can’t be deducted in current business operation circumstance.
Mr. Lu Guiqing, Delegate to National People’s Congress, also President of China Construction Fifth Engineering Group Corp. Ltd, expressed his opinion on this tax reform and advised for a 6% tax rate for construction industry.
The gap between theory and reality
Tax reform of construction industry hasn’t been executed yet, while replacement of sales tax by value-added tax is irreversible.
Lu Guiqing contended that according to current tax arrangement, construction enterprises bear more tax than enterprises of other industry. Data disclosed by National Bureau of Statistics indicates that tax levied on industrial enterprises above national scale was 50 percent of their net profit, but 100 percent of net profit against construction enterprises in 2012.
Construction enterprises make low profit in a whole and belong to little-profit industry. Net profit rate of listed construction companies was 2.4% in 2012, compared to 2.8% in 2011. Data released by National Bureau of Statistics shows that the highest yearly net profit rate achieved by construction enterprise in 2005-2012 was at best 3.5%.
The low profitability of construction industry should be mainly ascribed to the bidding disorder in construction industry in recent years, which consumes part of enterprises’ due profit. Chan Yan, Analyst of Shanghai Luban Consultancy Co., Ltd attributed increased cost and decreased gross profit of construction enterprises to greatly increased financing & labor cost.
Value-added tax rate during pilot period would be 11% in accordance with a notification jointly issued by Ministry of Finance & State Administration of Taxation with regard to Pilot Plan of Replacement of Sales Tax with Value-added Tax. After release of this news, related associations across the nation continually call construction enterprises to make assessment. China Construction Accounting Association also published its study report in this regard.
Actually, if 11% of tax rate is put in practice, overall tax burden of construction enterprises, by theoretical calculation, will remain unchanged or decrease slightly. Calculations by China Construction Accounting Association and pertinent organizations indicate that tax borne by construction enterprises will substantially increase after sale tax is replaced by value-added tax, and over 85% enterprises will service more tax.
An interviewed construction enterprise told reporters that it’s business income in 2012 totaled 20 billion Yuan. By rough calculation, it should be taxed 3% of the income before tax reform, but the tax rate would increase by about 2% if value-added tax is implemented.
In a report submitted by Lu Guiqing on Suggestions to Moderately Lower Value-added Tax Levied on Construction Enterprises, Mr. Lu listed tax changes of 10 construction enterprises subject to tax reform, whose tax will increase by 1.56% on average after value-added tax is adopted, with maximum 1.9% tax increase for some enterprise.
Increased tax further cuts net profit of construction enterprises, driving those enterprises which make meager profit go from bad to worse condition.
Invoice Dilemma after value-added tax is implemented.
The question is, why will construction enterprises service more tax in a circumstance where value-added tax is designed to their tax burden? People of this industry argue that the big difference between theory and reality results from the dilemma that tax on some incoming account can’t be deducted. Mr. Lu Guiqing also analyzed the financial indicator change after implementation of value-added tax.
Mr. Lu maintains that value-added tax is collected beyond price. On the one hand, in a value-added tax system, 11% of value-added tax is deducted from original sales tax, thus reducing income by 9.9%; on the other hand, as tax and cash outflow increase, the total profit decreases. In essence, invoice for incoming items can’t be fully collected, so there will be less tax deduction, causing tax and cash outflow to increase and profit to decrease.
As for the second reason, Mr. Lu specifically made following analysis:
Firstly, under current tax piloting circumstance, value added tax earmarked invoice is hard to be collected for special cost of construction enterprises such as labor and materials, resulting in inadequate tax deduction of incoming items. Construction industry is featured by labor intensive, where labor cost accounts for 20-30% of total, for which value-added tax invoice can’t be acquired for tax deduction according to current tax reform arrangement.
Secondly, according to Notice by Ministry of Finance and National Administration of Taxation on Goods Eligible for Low Value-added Tax Rate and Simple Value-added Taxation, general tax payers, under simple taxation regulation , will be levied 6% value added tax for selling self-produced construction goods such as sand & stone, bricks and tiles, cement and concrete, which lessen deductable value-added tax for construction enterprises
Thirdly, value added taxation system is in its piloting stage, and haven’t cover all industries, resulting in the absence of complete tax deduction chain. For instance, interest borne by enterprises’ loan from financing institute can’t be deducted from value added tax because tax reform of financial industry lags behind construction industry.
Fourthly, according to current tax reform pilot arrangement, value added tax against equipment, materials purchased before tax reform, and project under construction are not allowed to be deducted; if a supplier of self-supplied material issued invoice of value-added tax of materials to developer rather than construction enterprise, making material cost occurred to the latter unable to be recovered.
Fifthly, existing organizational structure, marketing pattern, centralized procurement, financial management, tax management and info system of construction enterprise don’t meet requirement for value-added tax management. Especially in terms of subcontractor and sub-supplier selection, it’s not easy to cultivate such general tax payers in a short term which can provide VAT earmarked invoice of large face value.
6% tax rate is advised.
Due to above-mentioned reasons, Mr. Lu Guiqing suggested for a tax rate of 6% for construction industry. An accountant made a calculation of taxable amount respectively on tax rates of 6% & 11% for a construction group corporation of revenue of 50 billion yuan. It should be taxed with 1.5 billion in the past, but will be levied with 2.25 billion yuan based on the tax rate of 11% after tax reform, 0.75 billion higher than in the past. If the tax is collected with a rate of 6%, the corporation needs to pay 1.3 billion yuan for tax.
Reportedly, certain authorities made this study outcome delivered to financial & tax administration through departments of Ministry of Housing and Urban-rural Development last year, and tax rate of 6% was advised, but it’s unknown whether it would be approved or not.
Meanwhile, Mr. Lu Guiqing Suggested that the scope for tax reduction shall be expanded as to relax tax burden on enterprises, including tax reduction for equipment and materials at stock and value-added tax for projects under construction; he also suggested that certain percentage of interest from borrowings should be deducted from tax and, that tax from labor payment shall be reduced and tax on materials such as and stone should be reduced.
Mr. Lu also mentioned that special taxation policy should be created in accordance with the unique characteristics of management of construction enterprise. He argued that construction enterprises had projects in different regions and the management would run into disorder if the current value-added taxation policy of “levying & settling locally” is implemented. He suggested that the tax should be collected in accordance with the place where the project is registered, and the tax rate should be respectively counted by the system of taxation and financial administrations.
At present, the value-added tax is collected monthly, but construction enterprise get their payment in accordance with progress of the project, and delayed payment is quite common. Mr. Lu suggested that the tax be collected in terms of real receivables and tax base.
In addition, he suggested that standard for bid pricing should be adjusted in accordance with real situations and value-added tax rate should be specified based on contract price so as to avoid cut-throat competition, that clause defining “designed subcontractors” and “Owner-supplied materials” should be improved in a construction contract, that buffer period should be allowed for construction enterprise due to difference of accounting principles and tax rules, and that tax reform plans should be formulated to targeting the companies which have BT projects with investment nature.
From China Construction News