China VAT changes to increase sourcing costs

1 August 2007
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02 August 2007 | Paul Snell

The cost of sourcing from China is expected to rise after changes to tax regulations in the country.

But as the new rules do not affect all products, buyers have been urged to investigate increases.

In July the Chinese Ministry of Finance introduced rules limiting the amount of VAT Chinese suppliers can reclaim on the commodities they purchase. As a result, these firms are passing the costs up the supply chain to international buyers.

The government made the changes to discourage manufacturing involving "high pollution" commodities. The country is also under pressure from the US to reduce its trade surplus. The ability to reclaim VAT has been eliminated completely on some products and reduced on others. Goods affected include certain chemicals, clothes, metals and machinery.

Martin Greenwood, supply chain manager at manufacturer TR Fastenings, told SM the prices of some products he buys have risen by 37 per cent. He said these costs will be passed on to consumers. "Freight costs have also increased as there has been a rush of products trying to leave China before the deadline and not a sufficient amount of transport," he added.

But Nick Farr, international tax partner at accountancy firm Grant Thornton, advised buyers to be vigilant: "It is not necessarily the case that [the regulation] will affect everyone, and some suppliers are trying it on as if it were a blanket recommendation.

"If buyers are being pressurised, they should confirm it is that commodity that is affected. Buyers need to know the relevant customs duty."


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