China mulls ending VAT rebate on steel products

Beijing, Feb 5: China is considering removing or reducing value-added tax (VAT) rebates on some steel products, government sources said on Monday, apparently accelerating the timetable for changes following a U.S. complaint to the WTO over the country's export subsidies.

In a case filed on Friday with the World Trade Organisation, Washington took aim at what it said were China's market-distorting subsidies such as export incentives, including rebates, reductions and exemptions from tax for many industries, among them steel.

''Right now cutting the trade surplus is a big priority for all the ministries,'' a source at a ministry said.

''Last year, steel products exports were too much and attracted criticism from overseas.'' An 8 percent VAT rebate would be reduced to zero for many low-end steel products, while rebates on other products, currently at 13 percent, would be cut to 5 percent, two sources with government ministries involved in the policy said on Monday.

A total of 136 customs categories, including steel plate and steel rods, would be affected by the changes.

The decision to reduce or remove the rebates is likely before the Lunar New Year, which falls on Feb. 18. A draft is circulating among several ministries and would have to be approved by the State Council, the sources at the ministries said.

There would be no grace period before the changes took effect, unlike some previous tariff adjustments, the sources said.

Beijing has been tweaking tariffs, credit policies and environmental rules to try and discourage rapid expansion by its steel industry for almost two years. It reduced or removed VAT rebates on many metals products in a series of directives issued from September to December last year.

In December, the vice chairman of the China Iron and Steel Association (CISA), Luo Bingsheng, said China would have to monitor the impact of the tariff changes in the first quarter of 2007 before making further adjustments.

The U.S. action appears to have accelerated the timetable.

Beijing could adjust tariffs on other products after moving on steel, the ministry sources said.

China's steel product exports soared 110 percent in 2006, to 43 million tonnes. Its steel product imports fell 28 percent to 18.5 million tonnes last year.

'Uneven Playing Field'

''Several of the subsidy programmes at issue appear to grant export subsidies, which provide incentives for foreign investors in China and their Chinese partners to export to the United States and other markets,'' according to Friday's announcement by U.S.

Trade Representative Susan Schwab.

''These subsidies offer significant benefits and are available for all products made in China, including, for example, steel, wood, paper, and other manufactured products.'' China prohibits foreign firms from buying controlling stakes in its 'major' steel mills, and only one company, Arcelor Mittal , has successfully purchased a direct stake in any of China's top 20 steel firms.

Foreign steel firms including Arcelor Mittal, Nippon Steel Corp., Posco and ThyssenKrupp A.G. have joint ventures in China, primarily making higher-value products that used to be imported such as stainless steel or automotive steel.

China assesses value-added tax of 17 percent on most manufactured products and adjusts rebates in an effort to manage specific industries. Many companies have to pay the full VAT up front and apply for rebates later, an onerous process.

VAT export rebates are allowed under the WTO.

''China is the only country to impose any VAT on its exports.

Other countries that have similar VAT policies don't assess VAT at all on exports, and the U.S. has no VAT tax in the first place to give rebates on,'' CISA Vice Secretary Qi Xiangdong said on Monday.

''Export incentives are given to overseas joint ventures but not domestic companies. It's a benefit for foreign companies that's unfair to our domestic products producers,'' Qi said. ''It's an uneven playing field for our Chinese companies.'' Qi did not comment on any possible change to current rebates on steel products.

Reuters