With VAT now implemented for the service industries of Shanghai, Beijing is rolling out the new Taxation system from 1st September 2012 with other provincial and city governments queuing up to bring VAT into place.

"The ultimate scenario is for the VAT system to be implemented nationwide - and across all industries. It is anticipated that this will occur before the end of the 12th Five-year plan, which is 2015," said Peter Law, Senior Manager, Tax Advisory Services at international audit and advisory firm Mazars.

Peter Law, Mazars tax advisory.

For now, it's Shanghai and Beijing leading the way. The VAT implementation timetable for the remainder of 2012 is Jiangsu and Anhui becoming valid on 1st October. Fujian and Guangdong will implement VAT on 1st November, followed by Tianjin, Zhejiang and Hubei on 1st December.

Q: Was the introduction of VAT in Shanghai considered a success?

A: The official report card confirms VAT has been successfully introduced in Shanghai. Actually, there were only a few hiccups. Apart from the fact that only 6-week notice was given prior to the actual introduction of VAT, overall the implementation saw no major upsets. Industries or businesses that have unresolved cases have been referred to higher levels to seek clarification. At the time being further guidelines are issued to avoid repeating cases.

Q: Beijing is followed by a number of provinces and cities, any surprises?

A: Beijing is home to a lot of service industry players, it is therefore natural for the capital to be the next city to implement VAT. Anhui's inclusion is interesting as it is not as modernized a territory as perhaps Fujian and Guangdong. These territories have all applied to the Central Government to implement VAT, as part of a strategy to attract and encourage new start-ups to set-up shop. As VAT is currently beneficial for the service industry, those start-ups would benefit directly from the program while the local government would benefit from seeing more competitive enterprises.

Q: Are the VAT guidelines for Beijing similar to the ones for Shanghai?

A: Yes, the main principles of the guidelines are the same. However, the biggest benefit for Beijing is to have more time for the implementation, which was originally scheduled for July. The extended preparation time will be helpful for accounting and taxation departments to train staff and prepare systems.

Q: Could Beijing or the other cities face any additional difficulties?

A: Shanghai was selected to be the pilot city as the city has the advantage to only operate one tax bureau. Beijing – as well as all the other territories planning to introduce VAT – operates two bureaus, a local business Tax Bureau and a State Tax Bureau.

The Central Government has decreed that these bodies must work in parallel and this probably explains the delay, to provide more time for a smooth co-ordination. There may still be other issues to address in this area as VAT is brought in.

Q: In what way is VAT working for China?

A: Initially, VAT is being introduced to help service providers, which is a mission of the central government, to grow and improve the service industries in China. While service providers such as accountants, IT services etc., are benefitting from the program, there are still some issues for other service providers to be ironed out.

In Shanghai, issues have arisen in how VAT is calculated for export services. Nationwide, transportation services will fully benefit from this program only when VAT is rolled-out in other cities across China.

Q: What do you see as the future for taxation in China?

A: The wider picture shows that while in the past, large amounts of tax were collected from land sales, the future seems to focus on VAT collection - which promises to be the richest source of revenue in the world once the program is implemented in all cities.

Although there is no fixed timetable for the VAT program to become nationwide and industry-wide, there is no doubt it is part of the central government vision. We believe this is the ultimate scenario and we expect it to occur before the end of the 12th Five-year plan.

Q: Sounds like you may have a lot of traveling ahead of you...

A: Yes. We will be running a road show with local Chambers of Commerce in the cities where the VAT program will be implemented. During those seminars, we will share our knowledge and experience from Shanghai as well as offer advice and help clients.