China Unicom has blamed a new value-added tax for a fall in sales and profits during the first three months of the year while losing more than 4 million customers during the quarter.

The company operates China's second-biggest mobile network but still appears to be losing out to China Mobile Ltd. (NYSE: CHL), the market leader, which earlier this week reported almost 9 million net customer additions between January and March. (See China Mobile Profits Fall Seventh Quarter in a Row.)

Net profit fell by 4.2%, to 3.16 billion Chinese yuan renminbi ($510 million), compared with the same period last year, while revenues shrank by 2.8%, to RMB74.3 billion ($12 billion).

China's authorities have replaced a business tax charged at a flat rate of 3% with a new value-added tax and China Unicom Ltd. (NYSE: CHU) held this entirely responsible for its earnings shortfall in the recent quarter.

Even so, while China Mobile also reported a decline in net income over the same period, it managed to increase sales by 3.9% on the back of customer growth.

Profits appear to have fallen at the bigger player mainly because of heavy spending on the promotion of 4G services.

China Mobile claimed that more than 143 million customers had joined its 4G network by the end of March, up from just 90 million in December, and now serves about 815 million mobile customers altogether.

China Unicom does not break out its 4G figures but classed 151.4 million of its 294.8 million subscribers as "mobile broadband" customers in its recent earnings report.

However, the overwhelming majority of these are likely to be using much older 3G services.

Like smaller rival China Telecom Corp. Ltd. (NYSE: CHA), the operator did not receive a license to operate 4G networks using FDD technology -- which it prefers to the TDD standard China Mobile is using -- until earlier this year. (See China Issues LTE FDD Licenses .}

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In the meantime, China Mobile has been able to build a huge lead in the 4G market by taking advantage of TDD technology.

TDD runs both uplink and downlink communications over just one allocation of spectrum, while FDD uses a separate frequency slot for each and is more widely used in other parts of the world.

China Telecom also plans to rely more heavily on FDD technology for its 4G rollout and has recently awarded 4G contracts to Alcatel-Lucent (NYSE: ALU) and Nokia Corp. (NYSE: NOK), which are currently planning a €15.6 billion ($16.6 billion) merger. (See AlcaLu Lands 'Top 3' 4G Deal at China Telecom, Nokia Sees Off Non-Chinese Rivals for China Telecom 4G Work and Nokia Makes €15.6B Bid for Alcatel-Lucent.)

Yet to report its own figures for the January-to-March quarter, China Telecom was serving 185.6 million customers in December, 119 million of whom were using mobile broadband services.

China Telecom has said it plans to invest as much as RMB63 billion ($10.2 billion) in capital expenditure this year, up from just RMB29.6 billion ($4.8 billion) in 2014, with most of the spending earmarked for the deployment of its 4G network. (See China Mobile Profits Fall on 4G Spending.)

— Iain Morris, , News Editor, Light Reading