China’s non-VAT exports are facing sporadic customs investigations and debt collection, quietly reshaping the export market. With the announcement of an electronic export goods declaration system and multi-department joint management, the market expects that this form of export will almost disappear soon, Kallanish notes.
In the past few years, Chinese steel exporters gain price advantages by evading VAT-payment, thereby increasing their competitiveness in overseas markets. The practice intensified last year, achieving a sharp increase in annual export volume. Last year’s steel exports thus hit the second highest in history.
The essence of the operation is that steel mills use shell agents to export steel, but agents do not pay the 13% VAT that should be paid to the domestic tax department during the receipt and export stage. In the past year, this usually has meant that exports through this route are about $15-20/tonne lower than normal exports.
On 28 March, the State Administration of Taxation, the Ministry of Finance, the Ministry of Commerce, the General Administration of Customs and the State Administration for Market Regulation jointly issued a document aiming at strengthening the standardised management of export goods that should pay domestic taxes, including VAT.
The document targets non-VAT exports. The lead of the State Administration of Taxation represents that this is actually a tax evasion problem. The joint participation of other departments not only ensures that supervision is in place, but also means that disciplinary measures will be in place.
Later, the Taxation Bureau of Shenzhen, a city where such illegal export agents are concentrated, issued a notice on Tuesday of a case investigating and punishing non-VAT exports. The goods illegally exported by 10 shell companies included ferrochrome. The total tax collection reached CNY 270 million ($37m).
Some market participants said that some illegal steel exports were investigated by the government at the ports of Jingtang and Tianjin. However, many market participants in Beijing and East China said that the follow-up measures are still unknown. These signals caused Chinese exporters to quickly cancel their non-VAT quotations this week, helping to improve the overall level of export prices.
However, it is not feasible to conclude that such investigations are on the rise at this time. As early as April last year, the authorities often stated that they had successfully investigated and fined illegal non-VAT exports.
For the near future, the disappearance of non-VAT exports is likely to be an issue in May. On 27 March, the General Administration of Customs issued a new version of the import and export goods declaration management regulations. The replacement of paper declarations with electronic data declarations and stricter confirmation processes will effectively plug this loophole.
Affected by this, a large number of signed orders are struggling to advance the shipping date of goods to April, or directly cancel the contract to avoid future risks.
“This is good for prices to grow,” an exporter says. “The disappearance of unreasonably low prices will also make market competition more reasonable.”
Steel mills will not be implicated if the government decides to investigate and punish past violations. Steel mills’ goods were legal before and at the time of arrival at the agents as long as they do not participate.
“Steel mills have insulated themselves from risk,” a Beijing-based market player commented on Thursday.
