1. Policy background
On March 5, Chinese Premier Li Keqiang stated in the government work report in 2019 that the VAT reform will be deepened. This year, the current tax rate for manufacture and other industries will be reduced from 16% to 13%, and that the transportation industry, the construction industry and other industries from 10% to 9%. The level applied with the VAT 6% will remain unchanged, but by adopting complementary measures such as increasing tax deductions for production and living services, it will be ensured that the tax burden of all industries will decrease.
2. Policy Analysis
We can see the following facts from this government report, and will analyze one by one.
(1) At present, China’s manufacturing industry’s value-added tax is 16%, and the government is currently planning to reduce it to 13% this year.
(2) Time to be determined, according to our experience, is expected to be implemented around May 2019.
3. Calculation Analysis by Twings
The main purpose of the government to reduce taxes is to promote the development of China’s manufacturing industry, of which the export proportion has always been large. Therefore, this tax reduction will reduce the cost of products for China’s export manufacturing industry.
If the corresponding VAT rate is lowered, the export tax rebate rate will be lowered accordingly.
Below Twings will use the children’s toy car factory for example calculations to check the impact on on the export cost of the factory after the coming tax reduction.
Case 1: Let’s suppose the tax reduction is 3% after May 1st, the factory is also willing to reduce cost by 3%. The USD RMB exchange rate is 6.7. The original price of a BENZ authorized car is 500RMB, with 16% VAT included. The tax rebate is 16%. Based on the cost formula of China’s foreign trade, and EX PRICE=64.33USD.
Upon tax reduction, the cost will become 485RMB with 13% VAT included and the tax rebate rate will be 13%. With the USD exchange rate unchanged, the EX PRICE cost becomes 64.06 USD.
Case 2: Let’s suppose the tax reduction is still 3% on May 1st, but the factory is only willing to drop by 2%, the USD RMB exchange rate is still 6.7.
If the tax is reduced, the cost will become 490RMB with 13% VAT and the tax rebate rate will be 13%. With the USD exchange rate unchanged, the EX PRICE cost becomes 64.72 USD. In this way, after the tax reduction, the cost of EX does not decrease, but increase instead.
4. Conclusion
First of all, the policy has not been officially announced, and there should be at least a one-month buffer period. As a Chinese exporter, especially a foreign trade company, in fact, this tax reduction policy has basically no positive effect on reducing costs. This estimation from the above can be seen. Therefore, as a foreign importer, it is impossible to expect to get a discount from a Chinese exporter.
