Textile and clothing industry: the impact of the pilot reform of transition from Business Tax to Value-Added Tax (VAT) on the textile and clothing industry

Starting from May 1,2016, China will comprehensively push forward the pilot reform of transition from Business Tax to Value-Added Tax (VAT) and double expansion.

On March 24, 2016, the ministry of finance published 4 detailed documents on the notice of comprehensive implement of the pilot reform of transition from Business Tax to Value-Added Tax (VAT), and clarified to carry out the pilot reform and implement the "double expansion" since May 1, 2016. One is expanding the scope of the pilot industry. The construction industry, real estate industry, financial industry and life service industry are included in the pilot scheme. Since then, the current business tax payers will all have changed to pay the VAT. Among them, the construction and real estate industry is applicable to the 11% tax rate and 6% tax rate is for the financial and life services. The second is to include real estate into the deductible range. After the last round of VAT reform that the enterprise purchase of machinery and equipment was included into the deduction, this time reform will include the real estate into the deduction. Weather the tax payer are the original VAT taxpayers of the manufacturing industry and commercial industry or the reform pilot taxpayer, they all can deduct with the VAT of real estates. The tax cut for 2016 from transition from Business Tax to Value-Added Tax (VAT) is expected to exceed 500 billion yuan
 
The textile and clothing industry will benefit significantly from this round pilot reform.
 
Although the textile and clothing industry itself belongs to the VAT tax paying industry while not belonging to the scope of this transition,this round reform fully including the real estate into the deduction item has significant effects in reducing investment cost. The textile and clothing industry, which has a large investment in real estate, will benefit significantly from the round reform. We estimate that the effect of the tax cuts will be mainly reflected in two aspects. First, the VAT from the new real estate in the current period will be divided into 60% plus 40% for two years separately to deduct the input tax, which will directly reduce the VAT tax paid by the company and will improve the company's cash flow. Second, the transition of business tax into VAT on real estate purchasing will decrease the tax base of company’s real estate purchasing from the original price to the original price/(1 + 11%) , thus it can reduce the depreciation and increase the net profit.