China cancelled export VAT refund for a wide range of iron and steel products

The Chinese government recently issued a notice (Notice No. 16/2021) to cancel the export VAT refund for 146 types of iron and steel products categorized by the HS codes.

The policy applies from May 1, 2021, and affects products including alloy steel power, cold-rolled non-coiled iron or non-alloy steel, hot-rolled coiled stainless steel, stainless steel wire, steel sleeper, seamless tubes, pipes and hollow profiles of iron or steel.

The list of affected iron and steel products were granted with VAT refund rates of 13% and 10%, which means that before the cancellation the exporters could claim all or most of the input VAT related to the production or purchase of these exported products.

However, following the cancellation, these exported iron and steel products will be treated as domestic sales by applying a 13% VAT rate, resulting in a higher cost for the exporters if they cannot shift it to the foreign buyers by increasing the price.

Chinese exporters will start to renegotiate the export price for the affected iron and steel products. Considering the underlying objectives for the cancellation, that on one hand aim to curtail the export of these products to meet domestic demands, and on the other hand aim to control the production capacity and force the product upgrade to reduce the carbon emission, it may be a long-term policy.

Foreign buyers may agree to take on a price increase or agree to bear the corresponding VAT cost, subject to the negotiation of how the parties share the cost. The latter approach may have a slight advantage if the policy is reversed in the future, and it will save having to renegotiate a price deduction. Therefore, it is advisable to review the tax clauses of the supply contract to assess the impact of the measures and possible remedies.