In China, the Ministry of Finance (MOF) and the State Administration of Taxation have jointly announced that more than 400 products will no longer be entitled to export VAT rebate from 15 July 2010.

As approved by the State Council, the adjustments will affect certain steel products, processed non-ferrous metals, pesticides, pharmaceuticals, chemical products, plastics, rubber & related products, glass and related products.  Official date of export to be determined by date shown on the Customs Export Declaration Form.

Tax rebates have been a key component to boosting exports. The standard VAT rate is 17 percent.   Our Shanghai Buying office commented that Steelmakers, for example, have been receiving a 9-percent refund to subsidise their exports of some steel products.

The VAT refund was on its way to being eliminated completely, up until the global financial downturn. In July 2007, Beijing eliminated or reduced refunds on about 2,800 items, accounting for about 40 percent of all export items.  It is widely seen as an indication that Beijing is resuming its structural reform efforts, which have been hindered since the global financial crisis flared. The last time China curtailed export tax rebates significantly was from spring 2007 – 2008, when it was pushing to reform their industrial structure, then mainly focussed on processing and assembly line work.

In Guangdong province, where export-oriented plants are concentrated along the coast, the trend is to relocate low value-added, labor-intensive factories to inland areas, replacing them with high-tech plants.  The removal of the export tax refund, which discourages exports and helps reduce excess capacity, will be used to speed up this process.

Overall these changes should encourage manufacturers to move away from competing solely on price and start increasing their focus on product innovation at the same time encouraging factories to concentrate more on the China market.