(“Circular  No. 43”) 财政部、国家税务总 局关于将电信业纳入营业税改征增值税试点的通知), issued by the State Administration of Taxation (“SAT”) and the Ministry of Finance (“MOF”)
As expected, telecommunications services is the next sector participating in China’s business tax (“BT”) to value-added tax (“VAT”) reform.
Circular 43’s key features are the following:
- It classifies telecommunications services into two categories subject to different VAT rates: basic telecommunication services and value-added telecommunications services
- Basic telecommunications services are the provision of voice communication services through a fixed network, mobile network, satellite and internet, and leasing or selling bandwidth, wavelength and other network activities. An 11% VAT rate is applied to basic telecommunications services.
- Value-added telecommunications services are the provision of shortmessage service, multimedia message service, electronic data/information transmission and application service, internet access, and ground transfer of satellite television signal through fixed network, mobile network, satellite, internet and cable TV network. A 6% VAT rate is applied to the value-added telecommunications services.
- Favorable policies
- Telecommunications services that domestic entities or individuals provide to overseas entities are exempt from VAT.
- Telecommunication services redeemed through raward points are not subject to VAT.
- Donation services China Mobile Limited, China United Network Communications Group Co., Ltd, China Telecommunications Corporation and their member companies provide through short-message services to listed charity institutions in Circular 43 are subject to VAT on a net basis.
As the VAT rates are much higher than the 3% BT rate, telecommunications enterprises are expected to have a heavy tax burden, at least in the short term, as the cost may not be passed on immediately to customers. Even as businesses continues to develop, the VAT burden on telecommunications enterprises may not reduce significantly, as they rely heavily on using input VAT incurred for purchasing and maintaining or upgrading facilities and infrastructures related to telecommunications businesses, while the daily operation does not involve many upstream suppliers with VAT charges.
Date of issue: April 29, 2014. Date of effectiveness: June 1, 2014.