China Backs Down on Controversial Tax on Asset Management Products

(Beijing) — China recently slashed the rate of a pending controversial value-added tax (VAT) on asset management products and pushed back the launch date for the second time, as the country backs down in its fight to slim down the overleveraged financial system.

The Ministry of Finance and the State Administration of Taxation said on Friday that a 3% VAT on gains on assets under management will be levied on asset managers and trust companies as of Jan. 1.

The rate is down substantially from the 6% that authorities proposed earlier this year, which resulted in heavy resistance from the investment community. Asset managers have said a new VAT will eat into their profits, constitute double taxation and increase administrative costs.

The new VAT was originally planned to be levied in May 2016. Due to criticism from the investment community, it was first postponed to July 2017, and deferred again to January only last week.

China’s asset management industry saw explosive growth in the last three years as investors looked for returns above meager deposit rates that were barely above the rate of inflation. Figures from the Asset Management Association of China show that the value of asset management products managed by securities firms, fund management companies and futures brokerages had quadrupled to 51.8 trillion yuan ($7.64 trillion) by the end of 2016, up from 13 trillion yuan at the end of 2014. The value of outstanding wealth management products issued by banks by the end of June 2016 was 26 trillion yuan, up from 15 trillion yuan at the end of 2014.

In May 2016, China expanded the VAT to the finance, construction, property and consumer service sectors in the country’s largest tax overhaul in two decades. The move aimed to lower the tax burden in the services sector and help transition the economy to a more consumer-driven one.

Contact reporter Liu Xiao (liuxiao@caixin.com)