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Lower VAT refund key to growth

Trade experts believe the reimbursement is holding back innovation and progress. Labor-intensive factories, however, think it is still a necessary policy to help bolster overseas sales.

Reducing the tax rebate may sound detrimental to China's export manufacturing industry, but doing so may actually stimulate development in various sectors.

Lower VAT refund key to growth

The VAT refund was on its way to being eliminated completely, up until the global financial downturn. As a short-term measure to boost exports, Beijing raised the reimbursement by different percentage points depending on the product line. This has enabled many suppliers to keep prices low despite various challenges that contributed to higher manufacturing costs.

Now that China is on a steady path to recovery, analysts believe it is time to lower the rate of rebates or reform the refund system altogether.

The government has taken the first step in this direction by removing rebates on more than 400 commodities from July 15 this year. But experts are of the opinion the same should be done, albeit gradually, for finished products. This will encourage manufacturers to move away from competing solely on price and start increasing their focus on product innovation.

China National Furniture Association vice president Zhu Chang Lin said keeping the export tax reimbursement at a high level will not help in companies' long-term development. The elevated refund, for instance, allows makers to keep prices low, which consequently leads markets such as Europe to launch anti-dumping investigations.

Even the central government is affected negatively by the rebate system. Statistics from the State Administration of Taxation show that a total of 648.8 billion yuan ($95 billion) were returned to export manufacturers in 2009.

Lan Wei Bing, China Ceramic Industry Association director for the Foshan office in Guangdong province, admits eliminating tax rebates would force uncompetitive low-volume factories out of business. But this is believed to be healthier for the industry. Buyers are quick to demand for commensurate discounts, and instead of being able to use the additional reimbursement to fund various endeavors, including product development, most manufacturers are forced to reduce quotes.

Rather than bemoan the lost income that could have been derived from the rebates, large enterprises such as ceramic tile maker Monalisa harness the latest technology to release innovative models. The company is now offering PP board, a superthin high-density ceramic tile, which, at 5.5mm, is one-thirds thinner than mainstream variants. Not only does this version exceed the national standard for density by 30 percent, it is also 60 percent better in maximizing material resources, uses 27 and 63 percent less energy and water to produce, and has reduced carbon dioxide and silicon dioxide emissions. The tile is said to be comparable with models made in Italy and Spain.

Some major electroacoustic companies invest at least 10 percent of turnover in R&D. These include AAC Acoustic, Goertek and Guoguang. Many of them also employ engineers from internationally known establishments. As a result, their products can compete with versions from Japan, South Korea and the US. Profits reach 20 percent as well, as opposed to the 3 to 5 percent gains from purely OEM suppliers.

Rebates lifeline of labor-intensive industries

While reducing or eliminating export tax rebates is generally considered a positive move by analysts, SMEs involved in sectors needing highly manual processes still need the reimbursement to survive.

Because of the VAT refund, General Secretary of China Electroacoustic Component Trade Association Wang Run Li said some factories in Zhejiang province can accept orders where they will only earn 0.01 yuan ($0.00146) per piece.

Further, the China Home Textile Association said most suppliers would lose their price edge and export orders if the 16 percent reimbursement is no longer in place. G&T Home Textile Co. Ltd believes buyers will always negotiate quotes, regardless of whether there is an export tax rebate or not. Launching new products is not necessarily a viable option for boosting income from overseas sales as prices cannot be set too high.

Unimax Home Textile Imp. & Exp. Co. Ltd general manager Qian Chen Yi said there is no effective alternative to the VAT refund and that companies would be forced to close if the reimbursement is reduced by more than 3 percentage points. For Unimax and Foshan Rongguan Glass Material For Building Co. Ltd, the best solution is to have a stable rate of rebate to ensure quotes will not fluctuate.

This comes even with the complicated process and lengthy collection turnaround associated with the VAT rebate policy. Suppliers generally have to wait between three and six months after filing the necessary paperwork before they can be reimbursed.

Note: This article "Lower VAT refund key to growth" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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