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Insight | Time: Mar 19 2019 9:58AM
Impacts of VAT reduction on cotton yarn market
 
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On Mar 15, Premier Li Keqiang mentioned that VAT would be reduced from Apr 1 in the answers to reporters’ request. VAT of cotton may be decreased 1% to 9% and that of cotton yarn and grey fabric may be revised down 3% to 13%, which will lower the cost and increase profits of textile enterprises. Thus, how much will it contribute to cotton yarn mills?

yuan/mt Procure cotton and sell cotton yarn before Apr 1 Procure cotton before Apr 1 and sell cotton yarn after Apr 1 Procure cotton and sell cotton yarn after Apr 1
The issue of high tax and low deduction has been solved. (Take Shandong as an example.) Tax of selling cotton yarn 3241 2704 2704
Cotton input tax deduction 2538 2117 2117
Final tax 703 587 587
The issue of high tax and low deduction has not been solved. (Take Xinjiang as an example.) Tax of selling cotton yarn 3241 2704 2704
Cotton input tax deduction 1600 1600 1453
Final tax 1641 1104 1250
Note: the cotton yarn in above figure refers to carded 32S and the tax is calculated based on cotton yarn selling price of 23,500yuan/mt and cotton purchasing price 16,000yuan/mt, after-tax.

At present, most major cotton yarn producing regions in inland has solved the issue of high tax and low deduction. The deduction standard of carded cotton yarn ranged in 1.1-1.18. Taking Shandong as an example, where the deduction standard is 1.15, it can be seen that after the tax reduction, cotton yarn mills will pay 117yuan/mt less no matter purchasing cotton before or after Apr 1. On the other hand, it is more beneficial to the regions where the issue of high tax and low deduction still exists. For example, in Xinjiang, cotton yarn mills can pay 391yuan/mt less after tax reduction. If cotton yarn mills use cotton purchased before Apr 1 and sell cotton yarn after Apr, the tax can be reduced by 538yuan/mt.

For most inland cotton yarn mills, selling cotton yarn after Apr 1 is favorable while for those in Xinjiang, purchasing cotton before Apr 1 and selling cotton yarn after Apr 1 is the most favorable. For downstream fabric plants, it is the same. If they purchase cotton yarn before Apr 1 and sell grey fabric after Apr 1, they can enjoy the 13% VAT and 16% input tax deduction.

Without considering the market, a kind of situations may appear.
1. Cotton yarn mills in Xinjiang procure more cotton and inland ones keep previous procurement tempo.
2. Cotton yarn mills hold the cotton yarn and keep reluctant to sell, especially those in Xinjiang.
3. Downstream fabric plants increase the cotton yarn procurement before Apr 1, especially conventional varieties.
4. The VAT reduction lowers cotton yarn cost and fabric plants wait for the fall of cotton yarn price.

The second and third conditions will result in the rise of cotton yarn price, while the fourth condition will drag down cotton yarn price. If so, the rise of cotton yarn price will depend on the procurement of weavers who may purchase cotton yarn until the price declines or purchase as soon as possible to earn the balance. Taking 23,500yuan/mt carded 32S as an example, if weavers procure before Apr 1, they can enjoy 705yuan/mt input tax deduction. That is to say, it is cost-efficient for weavers only if the cotton yarn price decreases by 705yuan/mt after Apr 1. As things stand, cotton yarn inventory is not high and the sales move smoothly. Market players still hold anticipation to peak season, so large discounts are hard to appear in short term. Thus, weavers are likely to restock cotton yarn in advance. But for cotton yarn mills, selling in advance means to reduce their profits, so they will prefer to sell slowly.

In conclusion, VAT reduction in short run may push up cotton yarn price in China, while in long run, as cotton yarn cost falls, the bonus will be allocated to market players. If the market does not improve obviously after Apr 1, cotton yarn price may inch down due to falling cost and advanced procurement.

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