Core tip: With the deepening of tax reform, the VAT reform in the construction industry is imperative. Starting January 1 this year, railway transportation and postal services have been included in the VAT pilot program. Last year, at the 3rd China Construction Enterprise

　　With the deepening of tax reform, the VAT reform in the construction industry is imperative. Starting January 1 this year, railway transportation and postal services have been included in the VAT pilot program. Last year, at the 3rd China Construction Enterprise Professional Managers Annual Meeting, an official from the Ministry of Housing and Urban-Rural Development predicted that the inclusion of the construction industry in the VAT pilot program would be implemented by 2015 at the latest.

　　The VAT reform was intended to reduce the burden on enterprises, but according to research and calculations by industry insiders, the tax burden on construction enterprises may increase rather than decrease after the VAT reform. Behind such a huge contrast, the difficulty of deducting input tax under the actual operating environment of the industry is exposed.

Lu Guiqing, a deputy to the National People's Congress and chairman of China Construction Fifth Engineering Division, put forward relevant opinions in his proposal at the Two Sessions, suggesting a 6% tax rate for the construction industry.

The gap between theory and reality

　　Although the tax reform in the construction industry has not yet been implemented, the implementation of VAT reform in the construction industry is imperative.

Lu Guiqing believes that under the current tax system, the tax burden on construction enterprises is heavier than that of many industries. According to data released by the National Bureau of Statistics, in 2012, the ratio of taxes paid to the state by industrial enterprises above designated size to their own profits was about 1:2, while the ratio of taxes paid by construction enterprises to their profits was about 1:1.

　　The overall profit margin of construction enterprises is low, making it a low-profit industry. From the overall net profit margin of listed construction enterprises in 2012, it dropped from 2.8% in 2011 to 2.4%. According to data released by the National Bureau of Statistics, from 2005 to 2012, the highest year for the profit margin of construction output value in China was only 3.5%.

　　This is mainly because in recent years, the chaos in bidding and tendering in the construction industry has squeezed the legitimate profits of the industry. Chen Yan, an analyst at Shanghai Luban Consulting Co., Ltd., analyzed that the sharp rise in financial costs and labor costs has led to an increase in total operating costs and a decline in gross profit.

According to the notice on the issuance of the "Pilot Plan for Replacing Business Tax with Value-Added Tax" jointly issued by the Ministry of Finance and the State Administration of Taxation, the construction industry is tentatively considered for the pilot at an 11% tax rate. Since this news was exposed, relevant associations across the country have continuously organized some construction enterprises to conduct calculations, and the China Construction Accounting Society has also released relevant research reports.

　　In fact, if the construction industry implements an 11% tax rate, the so-called unchanged or slightly reduced tax burden is only a theoretical calculation. According to actual calculations by the China Construction Accounting Society and other relevant departments, after replacing business tax with value-added tax, the tax rate for construction enterprises will increase significantly, and the number of enterprises with increased tax burdens may reach over 85%.

　　The reporter interviewed a construction enterprise, which had operating revenue of about 20 billion yuan in 2012. A rough estimate shows that before the VAT reform, its tax burden was about 3%, but after the VAT reform, its tax burden may increase by nearly 2%.

　　In the "Suggestions on Appropriately Lowering the VAT Rate for the Construction Industry" submitted by Lu Guiqing to the National People's Congress, he listed the changes in 10 construction enterprises before and after the tax reform. After the VAT reform, their tax burden increased by an average of 1.56%, with the largest increase reaching 1.9%.

The increase in tax rates further squeezes the profits of construction enterprises, and such changes are even worse for construction enterprises that are already in a low-profit industry.

The invoice dilemma after the VAT reform

　　Originally intended to reduce the tax burden on enterprises, why does the VAT reform increase the burden on construction enterprises? Some industry insiders pointed out that behind the huge contrast between theory and reality is the difficulty of deducting input tax under the actual operating environment. Lu Guiqing analyzed the reasons for the changes in relevant financial indicators of the construction industry after the VAT reform.

　　He believes that the first reason is that value-added tax is an off-price tax. After the VAT reform, the operating revenue of the construction industry will exclude the 11% VAT output tax payable from the original business tax, so revenue will normally decrease by about 9.9%. The second reason is that the tax burden and cash outflow increase, and total profit decreases. Essentially, input invoices cannot be obtained in full, and the deductible input tax is small, resulting in increased tax burden and cash outflow, and decreased total profit.

　　Regarding the second reason, Lu Guiqing stated that it can be specifically reflected in the following aspects:

First, special costs of construction enterprises such as labor and local materials are difficult to obtain special VAT invoices under the current pilot plan, and input tax deduction is insufficient. The construction industry is a labor-intensive industry, with labor costs accounting for 20%-30% of total costs. Under the currently designed tax reform plan, it is difficult to obtain deductible VAT input invoices for this part of the cost and self-owned labor costs.

　　Second, according to the "Notice of the Ministry of Finance and the State Administration of Taxation on the Policy of Levying VAT at Low Rates and by Simplified Methods for Certain Goods", general taxpayers selling self-produced construction sand, gravel, bricks, tiles, lime, concrete and other goods may choose to calculate and pay VAT at a 6% levy rate using the simplified method, which reduces the deductible VAT input tax for construction enterprises.

　　Third, the VAT reform has not yet covered all industries, and a complete industrial deduction chain cannot be formed. For example, interest on loans borrowed by enterprises from financial institutions cannot be deducted at present because the VAT reform in the financial industry lags behind that in the construction industry.

　　Fourth, the VAT contained in existing equipment, materials, and construction in progress purchased by construction enterprises before the VAT reform is not yet allowed to be deducted under the current pilot plan; if the supplier of "materials supplied by the owner" cannot directly issue the VAT invoice for materials to the construction enterprise but to the developer, then the VAT on this part of the cost of the construction enterprise cannot be deducted.

　　Fifth, the current organizational structure, marketing model, centralized procurement, financial management, tax management, and information systems of construction enterprises have not yet adapted to the management requirements of VAT. In particular, in the selection of subcontractors and suppliers, it is difficult to cultivate general taxpayers who can provide higher VAT special invoices in the short term.

Suggest implementing a 6% tax rate

　　In view of the above reasons, Lu Guiqing suggested in his submitted proposal to implement a 6% tax rate for the construction industry. An accountant calculated the 11% and 6% tax rates respectively. Taking a construction group with operating revenue of 50 billion yuan as an estimate, the business tax payable is 1.5 billion yuan. After changing to VAT at an 11% tax rate, the enterprise should pay 2.25 billion yuan in taxes, paying more than 750 million yuan in additional taxes; if calculated at a 6% tax rate, the VAT payable is about 1.3 billion yuan.

　　It is reported that last year, relevant departments submitted the results of their research to the fiscal and tax authorities through the relevant departments of the Ministry of Housing and Urban-Rural Development, and also proposed adjusting the pilot tax rate for the construction industry VAT reform to 6%, but the final result is still unknown.

　　At the same time, Lu Guiqing also suggested appropriately expanding the scope of VAT deductions to reasonably reduce the tax burden on enterprises. This includes allowing the deduction of VAT input tax contained in an appropriate amount of existing equipment, materials, and construction in progress; allowing a certain proportion of loan interest included in costs to be deducted from the tax base; allowing the deduction of input tax contained in labor payments; and allowing a certain proportion of input tax contained in local materials such as sand and gravel to be deducted.

　　He also mentioned the hope of introducing special tax collection and management policies tailored to the particularities of construction enterprise management. He stated that construction enterprises operate in a wide range of regions, with construction projects spread across the country. If the current VAT management model of "paying in advance locally and settling at the end of the year" is adopted for collection and management, it will cause management confusion and be difficult to operate. Therefore, it is suggested that the VAT for the construction industry should be centrally managed and paid at the place where the project is registered, and the fiscal and tax departments should settle their respective taxes through internal systems.

　　Currently, VAT is declared and paid monthly. Considering the high proportion of construction enterprises receiving payments based on project milestones and the widespread problem of delayed project payments, it is suggested that the calculation and payment of VAT should not be based on turnover but on the actual project payments received as the basis for calculation and payment.

In addition, he also suggested adjusting the bidding quotation standards according to actual conditions, clarifying that the owner should pay the enterprise's VAT through government agencies in addition to the contract price to avoid vicious competition; improving the clauses on "subcontracting designated by the owner" and "materials supplied by the owner" in construction contract texts; allowing a certain buffer period for payment of business tax time-based arrears formed due to differences between accounting standards and tax laws after the tax reform; and promptly introducing tax reform plans for BT project companies with investment nature.