China to trial telecoms value-added tax; could hit carriers' profits

By Paul CarstenReuters

China will trial a new value-added tax for telecommunication services providers as a replacement for business tax, Premier Li Keqiang said on Wednesday at the opening of the annual meeting of parliament, a change which could hit the companies' profits.

The trial is part of a set of reforms aimed at state-owned enterprises such as China Telecom Corp Ltd, China Unicom Hong Kong Ltd and China Mobile Ltd, the world's biggest mobile carrier by subscribers.

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Li did not provide details, but some analysts expect VAT of around 11 percent and a start date in the first half of this year - just as China's three carriers are increasing spending on fourth-generation mobile and broadband networks.

Consumers could be the main beneficiary of any tax reform as carriers could offer free or discounted handsets with service contracts to avoid high taxation, KPMG wrote in June.

VAT will certainly have a negative impact on the carriers' bottom line, said Neil Juggins, a Hong Kong-based regional telecoms analyst at JI Asia, an affiliate of Societe Generale.

"What they are saying they don't know is just how negative it will be," he said.

China Mobile's shares were down 0.34 percent in afternoon trade on Wednesday versus a 0.31 fall in the Hang Seng Index. China Unicom was down 1.92 percent and China Telecom was up 0.3 percent.

"We have discussed this for a while, but we haven't received any official notice from the government," said Zhou Xiaoke, a Hong Kong-based spokesman for China Unicom.

"We support the government and we will promote the policy, but since we haven't received the official notice it is too early to talk about (the financial impact)," Zhou said.

China Telecom declined to provide immediate comment while China Mobile was not available for immediate comment.


The government is also encouraging greater non-state participation in state-owned enterprises.

In December, China issued licenses for private companies, including e-commerce giant Alibaba Group Holding Ltd to act as mobile virtual network operators (MVNOs), who can lease excess network capacity from carriers and offer services under their own brands.

"We will formulate measures for non-state capital to participate in investment projects of central government enterprises, and allow non-state capital to participate in a number of projects in areas such as banking, oil, electricity, railway, telecommunications, resources development and public utilities," Premier Li said in his speech.

China will also permit non-public enterprise participation in franchising, Li said.


In a report also released on Wednesday, the National Development and Reform Commission (NDRC) highlighted its plans to "strengthen the country's infrastructure for broadband and Internet security."

"We will implement China's broadband strategy, support efforts to build 4G mobile communications networks and develop 4G businesses, and advance the delivery of telecommunications, radio and television, and Internet access over a single broadband connection," the NDRC said.

China's leadership flagged the growing importance of information technology development and Internet security last week when state media announced President Xi Jinping would helm an Internet security body, with the goal of turning China into a "cyber power".

Among the body's aims would be to coordinate Internet security among different sectors, and to draft national strategies, development plans and major policies, Xi was quoted as saying by the official Xinhua news agency.

(Additional reporting by Beijing Newsroom; Editing by Christopher Cushing)