You asked, we answered: What are the implications of the VAT reform in China? | Post by Ray Jia | Gold Focus blog

But now it is different. While SGE members that buy and sell gold on SGE in the “first tier” are still VAT exempt, the VAT treatment for members withdrawing gold is different, depending on their purposes. It is perhaps easier if we use hypothetical examples to explain the mechanics, illustrated in Figure 2.

SGE members who withdraw gold for investment purposes: 

The VAT treatment of SGE members who withdraw gold and re-sell it for investment purposes hasn’t changed. For example, if Bank A withdraws 1,000 yuan worth of gold from the SGE, which represents its cost, refines it into a branded bar and resells it at 1,050 yuan, which represents the sales price before VAT. In this case the applicable VAT is 13%* (1,050/1.13) – 13%* (1,000/1.13) = 5.8 yuan, raising the sale price after VAT to 1,055.8 yuan.⁴ This has not changed under the new tax reforms.

However, the input VAT tax deduction ends there. Here is what happens if Bank A sells the same product to a Client at the same price, and the Client sells this to a consumer at 1,100 yuan:

The Client’s tax burden is now 13% * (1,100/1.13) – 0 = 127 yuan, pushing the total sale price after VAT to 1,227 yuan. The new tax rule stipulates that SGE members cannot issue a special VAT invoice when they re-sell their investment products to any client, leaving the client with no “cost credit” to deduct. In this situation, the consumer will most likely choose to buy the same investment product directly form Bank A, which is a SGE member, as it would be cheaper. 

SGE members who withdraw gold for non-investment purposes:

SGE members who withdraw gold for non-investment purposes can now only deduct their sales VAT (at 13%) by 6% of their costs, instead of 13% previously. And the SGE issues only ordinary invoices instead of special VAT invoices to these members. For example, let’s assume that Jeweller B withdraws 1,000 yuan worth of gold from the SGE and plans to re-sell the jewellery product made from that SGE gold bar at 1,100 yuan:

• Before: Jeweller B’s VAT burden is 13% * (1,000/1.13) – 13% * (1,100/1.13) = 12 yuan, meaning the final sale price to its client after VAT will be 1,112 yuan
• After: Jeweller B’s VAT burden is now 13% * (1,000/1.13) – 6% * 1,100 = 55 yuan, raising the sale price after VAT to 1,155 yuan, which is 4% more expensive than the previous price of 1,112 yuan 

Suppose B’s client, Retailer C, plans to sell the same product for a hypothetical additional 20% profit, at 1,386 yuan (cost at 1,155 yuan), then the total VAT burden passed on to the end consumer will be 13%* (1,155* 1.2/1.13) – 13% * (1,155/1.13) = 27 yuan, meaning that the end consumer in this hypothetical example would pay 1,413 yuan for the product. In general, consumers will now likely pay more for their gold jewellery as the tax is usually passed down from the seller. 

Note that for illustrative purposes, we have only considered VAT in the above examples and have excluded all other taxes, such as stamp duty, city construction tax, education tax, etc.

SGE non-member clients who withdraw gold:

SGE non-member clients who open accounts via SGE members, are treated the same as SGE members who withdraw gold for non-investment purposes. They will need to sell their products at higher prices as they can only deduct their VAT at 6% of costs, rather than 13% as previously.