China Mulls Tax Rebates for Domestic Goods Entering Hainan Free Trade Port

The highly-rated free trade port of the southern province of Hainan is likely to enjoy an additional tax benefit as lawmakers consider offering tax rebates to domestic goods entering the island.

Value-added tax (VAT) and consumption tax that has been levied on such goods shall be refunded, reported (link in Chinese) the state-run Xinhua News Agency on Monday, citing the latest draft of the Hainan Free Trade Port Law submitted to the standing committee of the National People’s Congress, China’s top legislature, for a third reading.

The provision is aimed at balancing taxes on domestic and imported goods and leveling the playing field for domestic and overseas traders, and was proposed by some lawmakers during the second reading of the law, according to Xinhua. Seeking to turn the island into a world-class free trade port, lawmakers have pledged to simplify tax categories and take steps to adopt zero-tariff policy for imported goods.

The new law is aimed at clarifying the free trade port’s legal status and the draft has been circulated for public feedback.

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60 Measures in Hainan’s Planned Free Trade Port Policy

According to a plan (link in Chinese) released last June by the State Council, China’s cabinet, the Hainan free trade port will exempt tariff, import VAT and consumption tax for certain imported goods in the first phase, and will exempt tariff for all imported goods which are not included in a special list in the next phase after the island is declared a special customs territory at some point before 2025. Also, taxes and fees including VAT, consumption tax and vehicle purchase tax will be streamlined and merged, reads the plan.

In China, customs duties on imports range from 0 to 100% with the average rate of 12.47%, according to the Ministry of Commerce. An additional consumption tax is levied on some imported goods such as cars and jewelry at rates ranging from 1% to 45%. The standard VAT rate for imports is 13% and some specified goods enjoy a preferential rate of 9%, according to current regulations.

Hainan has already benefited immensely from supportive policies over the past year as authorities allowed tourists to buy more duty-free goods and issued approvals for more duty-free shops. Sales of duty-free goods on the island increased 236% year-on-year to 45.5 billion yuan ($7.1 billion) between June 2020 and May, following the release of the plan, state broadcaster CCTV reported (link in Chinese), citing data from Hainan local commerce bureau. The number of duty-free shoppers rose by 144% during the same period.

Companies are looking for opportunities in the free trade port and some have made a fortune. Leading duty-free operator China Tourism Group Duty Free Corp. Ltd. (601888.SH) reported a 32.6% rise in net income attributable to shareholders in 2020 despite the impact of the Covid-19 pandemic, citing surging duty-free sales in Hainan.

State-owned China Duty Free is planning a Hong Kong listing and has already submitted its application for an overseas IPO to the top securities regulator.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Flynn Murphy (flynnmurphy@caixin.com)

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