I. Status quo of “replacing business tax with value-added tax (VAT)”
For shipping enterprises, those that purchase ships bear a much lighter tax burden after business tax is replaced by VAT, but the tax on those that don’t purchase ships has increased a little. According to SISI’s survey of 90 domestic shipping enterprises, about 43.62% of them have to pay more tax to varying degrees, including 20.22% whose tax burden is increased by more than 10%.
For port enterprises, their tax burden has generally increased due to their small deductible costs, but only to a small extent. According to SISI’s survey of 30 domestic port enterprises, about 61.30% of them have to pay more tax to varying degrees, but mostly within 10%.
For shipping service enterprises, they have very few deductible costs due to the large proportion of labor cost in their total cost. According to SISI’s survey of 80 domestic shipping service enterprises, about 43.08% of them have to pay more tax to varying degrees, with international freight forwarders bearing the brunt. As the policy of tax levy with input tax deduction is cancelled for international freight forwarding industry as per the document Cai Shui  No.37, most enterprises in this industry have suffered severe losses according to the statistics of China Federation of Logistics & Purchasing (CFLP).
Replacing the business tax with VAT is an important part of China’s fiscal and tax system reform, and the reform itself is an ongoing progress of explorations, so the problems occurring during the trial run point out the direction for further reform in this area.
1. Constantly changing policies increase the burden on enterprises
In the two years from Cai Shui  No.111 to  No.106, there are as many as eight policy documents related with “replacing the business tax with VAT”, indicating constant adjustment and changes in this policy. For instance, Cai Shui  No.133 equaled shipping agency service with water transport service and levied 11% VAT, but Cai Shui  No.86 abolished this provision, equaled shipping agency service with cargo agency service and levied 6% VAT. Then Cai Shui  No.37 cancelled the policy of tax levy with input tax deduction for the freight forwarding industry, but Cai Shui  No.106 reinstated this policy for international freight forwarding industry. The constant policy changes result in many uncertainties for enterprises, affect their operation and industrial development and increase their burden.
2. Small deductible cost is the main reason for enterprise’s tax increase
This reform defines fixed asset investment made by enterprises after January 1, 2012 as deductible input, but fixed assets purchased before that date cannot be deducted. As shipping service enterprises are labor-intensive, they have very few deductible costs. On the other hand, Chinese shipping enterprises experienced high-speed growth around the financial crisis, but their capability and enthusiasm to update their shipping capacity is much weaker now, and their stock assets cannot be deducted, neither can the compensation for their employees, capital cost, toll fee, housing rent, insurance, port construction fee and cargo handling fee. The small deductible cost is the main reason for enterprise’s tax increase.
3. Changes in trading and settlement mode is detrimental to Shanghai’s efforts to build an international shipping center and financial center
After Cai Shui  No.37 was released, the policy of tax levy with input tax deduction was no longer applicable for the international freight forwarding industry, so the forwarders adjusted their former tax-included freight into tax-excluded and charged the clients with VAT and additional tax. The consequent rising price on the trader’s part lowered their competitiveness as well as profitability. Therefore, traders have all changed the trading mode from CIF contract to FOB contract since August 1, 2013, and used third-place settlement on a large scale. This isn’t good for China’s control over the cargo transportation right, nor for Shanghai to build a shipping settlement center. It also takes a toll on Shanghai’s efforts to build an international shipping center and financial center.
In regard to the problems occurring during the reform to “replace business tax with VAT”, the research team proposed suggestions and measures for improvements respectively on the national level and Shanghai level.
1. National level: making top design to deepen the reform
The scope of deductible input tax shall be expanded for transportation and logistics enterprises, and the policy to deduct input tax on enterprise’s stock fixed assets shall be issued on a trial basis. It shall be clarified that the additional tax levied by local governments shall be based on the amount of main taxes. Studies shall be carried out to reasonably lower the tax rate for the shipping industry (11% now) to lessen its burden. Implementation of relevant provisions concerning the “replacement of business tax with VAT” at different places shall be standardized and unified. Policies on tax reduction and exemption shall be abolished in due time, and the VAT structure shall be further simplified.
2. Shanghai level: issuing auxiliary measures to cushion the impact of tax reform
Shanghai’s municipal budget shall be arranged to return a certain amount of VAT to labor-intensive service enterprises based on the number of employees they recruit. Enterprises not registered in Yangshan are encouraged to register there, and the interests for various districts in the city shall be balanced through municipal tax distribution. Procedures of “simultaneous tax levy and return” shall be streamlined to improve business efficiency, and it shall be clarified that receipts for administrative charges such as port construction fee and cargo handling fee can be deducted. Policy publicity and training shall be strengthened.
3. Continuing to survey enterprises to follow up on the policy of “replacing business tax with VAT”
The Cai Shui  No.106 issued on December 12, 2013 took effect on January 1, 2014, which, compared with  No.37 that was implemented for less than half a year, reinstated the tax levy with input tax deduction for the international freight forwarding industry that had affected the industry significantly, but the document also left some problems. For instance, international freight forwarders can only issue regular business tax invoice, which, when received by traders, cannot be deducted, thus breaking the industrial chain, and the risks arising from the aforementioned change of trading and settlement mode cannot be fundamentally solved. According to the estimation of the tax administration, the document No.106 is likely to be superseded again in the near future. This shows that “replacing business tax with VAT” is a policy that is continuously improved. Relevant departments of Shanghai municipality shall continue to survey the enterprises and follow up on the dynamics of this policy, and make forward-looking policy suggestions to relevant central departments on optimizing the industrial structure and enhancing its competitiveness, with the aim for the healthy development of the transportation industry.