By Wang Fang(王芳)， Li Li (李丽)

News, cover

Issue No. 543, Nov 07, 2011

Translated by Song Chunling

Original article: [Chinese]

Restaurant chain South Beauty (俏江南) has been trying to hold an initial public offering since March, but it’s still waiting. China’s stock market regulator received the company’s application, but hasn’t given any response. Golden Jaguar (金钱豹) and Xiao Nan Guo (小南国) face similar problems.

The root of their problems is a lack of receipts or fapiao, which accounts require in order to support their audits of businesses. “In the past, restaurants wouldn't offer receipts unless customers asked for them,”says Ma Jinghao (马靖昊), a tax expert.

Private equity investors have also been avoiding the restaurant business, where transactions are mostly in cash and tax evasion is a big problem. “Who’s going to invest in restaurants when the National Development and Reform Commission ignore them,” says one venture capitalist.

Only three of China’s restaurant chains are publicly traded, even though the sector’s combined revenue exceeded 1.7 trillion yuan in 2010, and, according the National Bureau of Statistics, is likely to reach 2 trillion yuan this year.

Addressing restaurateurs at a recent meeting in Shanghai, the securities regulator said that their reliance on cash for purchases and sales has made it hard to evaluate the true costs and income. Restaurant chains’ high turnover of staff also means that are often irregularities in their social security arrangements.

The stock market regulator now wants to raise the standard for restaurants. The EO learned that China Securities Regulatory Commission is drafting new regulations for chains that want to list, which would require all companies that apply to have an annual profit of at least 50 million yuan, compared to 30 million yuan now.

As an incentive to encourage customers to ask for receipts, and guarantee that sales are recorded for the tax collectors, all Chinese receipts have a scratch box in the corner, which customers can scratch away and claim back a few yuan from the retailer or restaurant. Since restaurants are legally required to provide the receipts, they often offer gifts or discounts to customers as a way around the rule.

“Many consumers want the receipts to scratch for the prize, but more of them ask for discounts instead,” said the owner of one restaurant.  “By now, I can tell at first sight who wants receipts to get the refund and who is after the prize.”

The owner admits that most restaurants only pay tax on half their income, or less. Since they buy raw materials directly from farmers, it’s easy to deal in cash.

Many restaurants keep “a second book”, recording the business real performance, as an alternative to the official accounts.

People tend to assume that the less receipts a restaurant issues, the less tax it's asked to pay. In fact, the situation is more complicated - tax departments set them a minimum payment according to their size, location and operation, and the businesses are required to inform the officials when their income exceeds this level.

One owner said that his legal minimum is only 35 percent of the actual 200,000 yuan that he takes in each month. However, if he provides a receipt to every customer who asks, he’ll be forced to break the restaurant's 70,000 yuan threshold, which will encourage the tax official to raise his quota, which would push his business into the red.