China’s value added tax (VAT) reform is being broadly applied to the financial services sector in a move that could boost the sector in the long-term.

With the reform, businesses including banks, insurers and asset managers will transition to a VAT regime from a business tax (BT) rule. China’s new VAT system for the financial services sector is unique as the country will be the first to tax interest income under a VAT.

Financial services providers are remunerated through interest on loans and fee-related services, including late-payment fees, penalties, credit card and application fees. From May, the levy on these fees moves from a percentage of (about 5%) of revenue to just the value added at each step of the service at 6%, according to the State Administration of Taxation. Exemptions also apply for several transactions.  

The new regime should ease the tax burden on financial services industry over the long term given that a lower tax base and tax deductions on tangible assets apply, said Wang Weiqing, a committee member of China International Taxation Research Institute. He noted that the reform is going to boost the financial services industry as the VAT system is efficient and repetitive tax can be avoided.

Shi Yaobin, Vice Minister of Ministry of Finance in China, said that one of the objectives of the VAT reform is to reduce the tax burden for Chinese companies in the face of an economic downturn.

Minsheng Securities estimated that the five insurance companies listed in China’s A-share market can enjoy 4.05 billion yuan in tax cuts, leading to an average 6.8% increase in profit for each company.