The Impact of VAT Reform on Financing for Printing Equipment

Starting from January 1, 2009, China began implementing a new VAT policy. One important provision is that the VAT paid by enterprises when purchasing equipment can be credited as input tax against the output tax on product sales. This greatly boosted enterprises' desire to invest and reduced the cost of purchasing equipment. It is very much in line with China's requirement to continue expanding domestic demand in the face of the financial tsunami.

What impact does the introduction of this policy have on financial leasing in the printing industry? We must examine the tax-related characteristics of financial leasing for printing equipment to analyze the advantages and disadvantages.

The lessees in financial leasing are mainly small and medium-sized enterprises;

Lessee enterprises mostly engage in cash transactions, and their finances are usually non-compliant;

Leased assets are mostly limited to the printing machinery of five imported equipment manufacturers, all of whom are using Chinese funds to bear the risks of their credit sales;

To date, only Shanghai Electric is a manufacturer that has set up its own financial leasing company and uses leasing to conduct credit sales;

The lessee signs a purchase contract with the manufacturer and then carries out financial leasing through a sale-and-leaseback arrangement.

Because SMEs' financial practices are non-standard, the printing equipment they acquire through financial leasing does not need to be credited. Second, because there is no credit, the import-stage VAT on imported equipment, compared with past tax reduction and exemption policies, increases procurement costs.

Under normal procurement procedures, if an enterprise imports printing equipment, it can use the customs import-stage VAT payment certificate to credit VAT against VAT on sales. Therefore, there is no loss for the printing industry, nor does it bring any additional benefit. This is because in the past, tariffs and import-stage VAT on imported equipment were mostly exempt. Now, although VAT is levied, it can be credited back against the output tax generated at the time of sale.

After China implemented VAT transformation, the financial leasing industry encountered a difficult problem: to ensure title to the leased asset, the buyer of the leased asset is usually the leasing company. However, because the leasing company is a service institution and not a general taxpayer, it cannot issue VAT invoices to the lessee enterprise. Tax authorities treat the leasing company as the final consumer, and the VAT flow stops at the leasing company. But the lessee cannot use the special VAT invoice issued by the manufacturer to the lessor to claim a credit. Therefore, the cost of acquiring fixed assets with domestically produced equipment through financial leasing is higher than the cost of direct procurement by printing enterprises.

Imported equipment has the following advantage. First, the general invoice used is a commercial invoice issued by the enterprise, in several originals. Although it is made out to the leasing company (in fact, it makes no difference to whom it is issued), it can be issued separately to the leasing company, import agent, lessee, customs, transport, insurance, and other departments. Second, the import-stage VAT is paid by the lessee, and the customs tax payment certificate is issued directly to the lessee. Therefore, the lessee can use it for direct credit.

For financial leasing of domestically produced equipment, because of the format of the special VAT invoice, the lessee cannot use it for credit. So it does not receive such treatment. The share of financial leasing for domestically produced equipment was already small; if this continues, it will amount to killing off the financial leasing transaction method for domestically produced equipment. This is very unfavorable to the country's requirement to expand domestic demand. However, there is no way around it—this is not a problem for the printing industry alone, but one encountered by the entire financial leasing industry. Although everyone is appealing to the tax authorities, and the tax authorities also recognize the existence of this problem, there has still been no sign of a solution to date.

One purpose of the VAT reform is to require enterprises, especially SMEs, to standardize their financial operations. On the issue of VAT credits, because many transactions are cash-based, you may not care whether a credit is possible. But you must pay 17% more in procurement taxes and fees than enterprises with standardized finances that can claim credits. In the future, cash-based transaction methods can no longer evade or underpay taxes.

— This article is reposted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-362134.html