Yesterday, the State Administration of Taxation (“SAT”) issued a piece of new regulation, titled as “Notice on Strengthening the Administration of Land VAT Collection” (“Notice”), as part of central government’s efforts to rein in property market frenzy.

The major policy shift under the Notice is that SAT now explicitly imposes the bottom tax rate for pre-collecting land VAT. It is provided therein that in the eastern, central and east-northern, and western China, the pre-collected land VAT rates shall not be less than 2%, 1.5% and 1% respectively. Pre-collection of land VAT applies where the added value of land is hard or impossible to determine or substantiate, for example, in the case of pre-sold houses before the completion of development projects.

Land VAT is usually collected based on the added value of the land. However, pre-collected land VAT is calculated based on the total proceeds of real estate sale.

Previously in Shanghai, pre-collected land VAT rate is 1%. Now under the Notice, this number shall be at least doubled, which will take away a substantial portion of the profits of real estate developers.

While such tax measure may dampen the enthusiasm of developers to launch new projects, I doubt that such measure is capable of dragging down or reining in housing price. Instead, developers may shift the tax burden to house buyers which may in the end push up the prices. On the other hand, I personally believe the fundamental way to solve the housing problem in China is to increase supply of houses (those catering to both poor and rich people) to market, but such tax disincentive may affect the developers to launch new projects due to lack of money.

Let us wait and see.