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The State Administration of Taxation's decision to resume collection of value-added tax (VAT) on land has caused panic among property developers, who are reportedly planning to write a joint letter to local government leaders.

 

According to the January 16 government notice, the VAT, which has been suspended for more than a decade, will again be collected from February 1. Property developers will have to pay 30 to 60 percent of their net gains as VAT on land.

 

The VAT will be collected when a single development project is completed or transferred, according to the notice.

 

Property share prices declined on the Shanghai, Shenzhen and Hong Kong stock exchanges after the announcement.

 

The 21st Century Business Herald reported that large property developers in Shanghai met a few days ago and plan to write a letter to city leaders, urging them to consider their predicament.

 

"Rather than settling the value-added tax, the notice simply intends to decimate property developers," an unnamed executive from a prominent property development firm was quoted as saying by the newspaper.

 

The letter will also argue that Shanghai property developers are not "profiteering" as has been widely reported. Many local developers are instead facing a funds shortage, and the VAT would push them into bankruptcy and cause greater risks for banks, according to the 21st Century Business Herald.

 

The developers also hope the government will adjust the VAT to a more reasonable level.

 

Analysts said the property developers wanted to make a move before the local government announces detailed procedures for the collection of the VAT. The tax is an important source for local government coffers.

 

China introduced the VAT on land in 1993, but it was often not collected due to subsequent recessions in the property market. Some cities and provinces are collecting the tax at a rate of 1 to 2 percent of advance sales of newly developed houses. In Shanghai, the rate has been 1 percent since 2002, but implementation did not begin until 2004 in a few districts.

 

According to reports, local property developers behind the letter include large real estate companies, which are "big landlords" in Shanghai and have good government connections.

 

(China Daily January 24, 2007)