<div id="readability-page-1"><div>By Ka Sing ChanA new risk is emerging for Chinese companies: higher tax bills. Investors largely shrugged off $220 billion China Mobile's , surprise announcement on February 1 of increased levies on the country's telecoms sector. But that looks premature. Falling fiscal revenue will probably prompt Beijing to reconsider preferential tax treatment for tech and other sectors.The country's largest mobile network operator said some of its telecommunications business will now be considered &#34;basic services&#34;, resulting in a higher value-added tax of 9%, up from 6% previously. Given China Mobile's dominant market share and healthy cash flows, the financial hit should be manageable. HSBC analysts reckon the added taxes should knock just 6% off this year's earnings. After a brief selloff, the company's Hong Kong-listed stock is back to where it was before the news, though those of smaller peers China Telecom , and China Unicom Hong Kong are still down.Still, it may be premature to dismiss this episode as a one-off. True, state media has quashed speculation that there will be a broad-based tax hike targeting private firms, particularly video games and internet companies which have long enjoyed a lighter tax burden than many state-owned groups. The $625 billion tech behemoth Tencent , for instance, paid an effective rate of 18.6% of its pre-tax profit in 2024, below PetroChina's 23.9% and Kweichow Moutai's 25.3%. The difference reflects the tech sector's strategic role in the economy.<figure><figcaption>Thomson ReutersChinese tech firms pay a lower effective tax rate</figcaption></figure>Strained public finances, however, may prompt a rethink in Beijing. China’s fiscal revenue fell 1.7% last year to 21.6 trillion yuan ($3.1 trillion), the first annual contraction since the Covid-19 pandemic. While stamp duties collected on securities surged, thanks to the country's stock market rally, revenue from non-tax sources fell by 11.3% while tax revenue remained flat. Meanwhile, land-sale receipts, the most important revenue stream for local governments, fell for the fourth consecutive year, by 14.7%.This is a growing headache for policymakers, who have pledged to expand fiscal spending this year. China's tax collectors may soon start knocking on more corporate doors.CONTEXT NEWSChina Mobile said on February 1 that its value-added tax rate for some of its telecommunication services will be increased to 9%, from 6%, and that the new rate will have an impact on the company's revenue and profit.Rivals China Telecom and China Unicom Hong Kong announced the new VAT rate on the same day. </div></div>

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China Mobile's recent announcement of increased value-added tax (VAT) from 6% to 9% on some services signals potential risks for Chinese companies amid falling fiscal revenues. While the impact on China Mobile's earnings is estimated at 6%, smaller competitors like China Telecom and China Unicom are still feeling the effects. Despite state media downplaying broad tax hikes, strained public finances may lead to a reevaluation of tax policies affecting the tech sector, which has historically enjoyed lower rates compared to state-owned enterprises. Policymakers face challenges as local government revenue continues to decline.

China Mobile tax pain points to bigger risks