VAT in China is a significant component of the tax system in China and plays a crucial role in the country’s revenue generation. VAT is a tax levied on the value added to goods and services during the production process. The Chinese government introduced VAT in the early 1990s as a way to broaden the tax base and improve the efficiency of tax collection. The Chinese government has been gradually implementing a VAT system since 2012, replacing the previous Business Tax (BT) system. As of January 1, 2019, all industries in China are subject to VAT.
China levies Value-Added Tax (VAT) on a wide array of products and services, ranging from the importation of goods to financial services such as deposit account interest. This tax is levied on goods and services at each stage of production and distribution, based on the value added during that stage. Businesses in China are required to comply with VAT regulations, including registering for VAT, issuing invoices, maintaining accurate records, and filing returns and payments on a regular basis.
This tax system is only applicable in mainland China, with the Special Administrative Regions of Hong Kong and Macau excluded. Exports are exempt from VAT, which could be seen as a way to encourage international trade. Unusually, residential property sales between consumers are also subject to VAT taxation, unlike in many other countries where this type of transaction is not subject to taxes.
Companies registered in China are required to comply with VAT compliances, both domestically and internationally. Companies must submit VAT returns on a regular basis and keep detailed records of their VAT payments and receivables. Furthermore, companies should also be aware of any changes made to VAT regulations and make sure their operations remain compliant.
In this article, we’ll cover the fundamentals of Value-added tax (VAT) in China. We’ll talk about how VAT works for imports, what regulations and obligations, businesses need to follow, who has to register for Chinese VAT, and recent policy changes that impact VAT taxpayers. We’ll also explain the differences between VAT small-scale taxpayers and VAT general taxpayers, and show you how to calculate the VAT you owe.
What is Value-added tax (VAT in China)?
Value-added tax (VAT) is a tax added to goods and services during the production and distribution process in China. It’s kind of like a sales tax that’s charged at each step of the way based on the value added during that stage. The seller usually pays this tax, which is calculated as a percentage of the sales price. In 1994, China introduced VAT to replace the Business Tax, and it’s now an important way for the government to earn money.
In China, businesses that are registered are obligated to follow VAT regulations both locally and globally. This involves regularly submitting VAT returns and maintaining thorough records of their VAT payments and any amounts owed to them. To remain compliant, companies should stay informed of any changes made to the VAT regulations that may impact their operations.
How Does VAT Work for Imports in China?
When it comes to imports, the VAT system works by requiring importers to pay taxes based on the cost of their imported goods plus any additional cost associated with said goods. This includes transportation fees, administrative charges, packaging costs, and any other miscellaneous fees related to the imported products. The amount of VAT that needs to be paid will usually depend on the product’s type and its intended use or purpose. Furthermore, all businesses that purchase or obtain goods or services within China must also pay VAT in order for them to be able to operate legally.
Importing from China can help businesses diversify their supply chains and reach new markets. However, it’s important to be aware of the procedures involved.
Financial services such as savings account deposits, interest payments, stocks, and bonds are also subject to VAT in China. The amount of tax owed is based on the length of time the taxpayer held the investment and the returns earned during that period. Keeping detailed records of VAT payments and staying updated with changes in VAT regulations is important for compliance.
There are two types of VAT taxpayers. Small-scale VAT payers are those whose annual VAT taxable revenue is RMB 5 million yuan or less. They engage in the production of goods or provision of taxable labor services, and their annual sale amount subject to VAT does not exceed RMB 5 million. Small-scale taxpayers engaged in the wholesale or retail of goods have annual taxable sales of RMB 8 million or less.
Types of VAT
| General VAT Taxpayer | Small Scale Taxpayer | |
| Application Criteria | If an enterprise’s annual taxable sales reach or exceed RMB 5 million, it must apply for the qualification of VAT general taxpayers. Failure to apply will result in mandatory ratification as a general VAT payer.A company that is newly registered or has annual taxable sales below RMB 5 million can apply for general taxpayer qualifications if it has a reliable accounting system and can provide accurate tax information to the tax authorities in charge | When an enterprise is registered, it will automatically be recognized as a VAT small-scale taxpayer without the need for a separate application.The company must ensure that their yearly taxable sales do not surpass RMB 5 million |
| VAT rate | Yes, VAT is levied in China at different rates depending on the type of goods or services supplied, with rates ranging from 6% to 13%. | The applicable levy rate is 3 percent |
| Way of collection | VAT and its surcharges shall be declared on a monthly basis | VAT and any related surcharges must be reported on a quarterly basis |
| Issue special VAT invoices | Yes | Yes. However, this restriction has been relaxed and small-scale taxpayers are now allowed to issue special VAT invoices directly. |
| Input vat credits | Yes, generally is for claiming business purchases | No |
| Receive special vat invoices | Yes | No |
In China, there are two types of VAT taxpayers: General Taxpayers and Small-Scale Taxpayers. General Taxpayers are large-scale enterprises with an annual taxable income of more than RMB 5 million and are subject to a VAT rate of 17%. On the other hand, Small-Scale Taxpayers are businesses with an annual taxable income of less than RMB 5 million and are subject to a lower VAT rate of 3% or 6%.
General Taxpayers are responsible for calculating, reporting, and paying VAT on their own. They are required to keep detailed records of their taxable transactions, including invoices and receipts, to facilitate the calculation of VAT. Furthermore, General Taxpayers are subject to periodic tax audits, and non-compliance with VAT regulations can result in significant penalties and fines.
Small-Scale Taxpayers, on the other hand, are eligible for a simplified VAT calculation and reporting process. They are also eligible for preferential tax treatment, which can help to reduce the overall tax burden on small businesses. However, Small-Scale Taxpayers must still comply with the relevant VAT regulations and ensure that they accurately report and pay VAT on time.
How to decide between VAT small-scale taxpayers and VAT general taxpayers in China?
Businesses in China have the choice to register for VAT as either small-scale taxpayers or general taxpayers. Small-scale taxpayers are usually small businesses with lower annual revenue, while general taxpayers are larger businesses with higher annual revenue. When deciding between the two, businesses should consider their size, industry, customers, and ability to handle VAT requirements. General taxpayers have more benefits, such as the ability to issue invoices and claim VAT credits, but also face more complex regulations. Businesses should evaluate their situation and weigh the advantages and disadvantages before choosing which type of taxpayer to register as.
Obligations and regulations
It is important for businesses operating in China to understand their VAT obligations and ensure compliance with the relevant regulations. This includes keeping accurate records of taxable transactions, calculating VAT correctly, and reporting and paying VAT in a timely manner.
The VAT rate for general goods and services is 17%, while there are reduced VAT rates available for some types of goods such as food, medical equipment, books, and newspapers (6%). There are also even lower VAT rates applied to some specific items – for example, electricity is subject to a 3% VAT rate. In addition to standard VAT rates, zero-rated VAT applies to exports from China, as well as some goods and services that are VAT exempt.
- Registration: Any business that engages in the sale of taxable goods and services in China must register for VAT with the local tax authority.
- Taxable Goods and Services: VAT is charged on the sale of most goods and services in China, with the exception of a few items that are exempt.
- Tax Rates: The standard VAT rate in China is 13%, but there are also reduced rates of 9%, 6%, and 3%.
- Invoicing: All businesses must issue VAT invoices for the sale of taxable goods and services in China.
- There are two types of invoices: general VAT invoices and special VAT invoices.
- Record-keeping: Businesses must keep accurate records of all VAT invoices issued and received, as well as any VAT payments made.
- Filing and Payment: VAT returns must be filed and paid on a monthly or quarterly basis, depending on the size of the business.
- Compliance: Businesses must comply with all VAT regulations and rules, including the timely filing of returns and payment of taxes.
- Auditing: Tax authorities may conduct audits of businesses to ensure compliance with VAT regulations and rules.
Taxpayers can claim VAT deductions on taxes paid for purchases, provided the VAT has been correctly invoiced and the purchased goods or services have not been used to produce non-taxable income. Businesses must also comply with specific VAT regulations when invoicing customers, filing VAT returns, and paying VAT.
Who is required to register for Chinese VAT?
Businesses that engage in the sale of taxable goods and services in China are required to register for Chinese VAT. This includes both domestic and foreign businesses. The threshold for VAT registration varies depending on the type of taxpayer, with different thresholds for general taxpayers and small-scale taxpayers. Generally, businesses with annual taxable sales above RMB 5 million are required to register as general taxpayers, while businesses with annual taxable sales below RMB 5 million can choose to register as small-scale taxpayers. However, there may be some exceptions or special rules depending on the industry or type of business.
Typical situations requiring a Chinese VAT registration include:
- Businesses that sell taxable goods or services in China, whether they are domestic or foreign entities.
- Businesses that import goods into China and resell them domestically.
- Businesses that engage in cross-border e-commerce activities involving the sale of goods to Chinese consumers.
- Businesses that provide certain services to Chinese customers, such as consulting, advertising, and design services.
- Businesses that engage in construction or real estate activities in China.
Can overseas companies register as general VAT taxpayers in China?
Foreign entities outside China cannot register as general VAT taxpayers in China. They must establish a local presence, such as a foreign-invested commercial enterprise, wholly foreign-owned entity, or Joint Venture. Representative offices may operate with limited functions. Only individuals have thresholds for VAT liability, which are very low in China, ranging from RMB 5,000-20,000 per month of sales or RMB 300-500 per transaction in most provinces. Businesses and other units automatically have VAT liabilities on their taxable transactions regardless of turnover.
VAT for Foreign entities in China
Value-Added Tax (VAT) is a tax levied on the value added to goods and services during the production process in China. It is a significant source of revenue for the Chinese government and plays an important role in the country’s tax system. Foreign entities operating in China must comply with VAT regulations to ensure that they are operating legally and efficiently.
Foreign entities operating in China are generally classified as General Taxpayers and are subject to the standard VAT rate of 17%. They are responsible for calculating, reporting, and paying VAT on their own and must keep accurate records of taxable transactions to facilitate the calculation of VAT.
Foreign entities must also ensure that they comply with the relevant VAT regulations, including reporting and paying VAT on time. Failure to comply with VAT regulations can result in significant penalties and fines. It is recommended that foreign entities seek professional advice to ensure that they are fully compliant with VAT regulations.
Who pays the VAT on imported services to the Tax Authorities?
When it comes to paying VAT on imported services, it’s the recipient of the supply who is responsible for paying on a withholding basis. However, it’s important to note that both the overseas supplier and the local recipient may be held liable if there is any underpayment of VAT. So, it’s important for both parties to make sure everything is in order to avoid any potential issues.
How to Calculate VAT Payable
Calculating VAT payable is important because it helps businesses determine how much they owe to the government in taxes. By accurately calculating VAT, businesses can avoid underpaying or overpaying taxes, which could result in penalties or missed opportunities for tax refunds. Additionally, having a clear understanding of VAT payable allows businesses to better manage their cash flow and budget for tax expenses.
The basic formula for calculating VAT payable is:
VAT payable = Output VAT – Input VAT
Output VAT is the VAT charged on sales of goods or services, while Input VAT is the VAT paid on purchases of goods or services.
Recent Changes
VAT policies in China have been undergoing significant transformation since 2018, and the country has set a target to fully transition to VAT by 2023. VAT is a type of indirect tax that applies to goods and services, replacing the business tax system that had been used many years prior. This shift has brought about far-reaching implications for businesses operating in China, as VAT is calculated according to value added at each stage of production or distribution. It also affects cross-border trade significantly, as VAT must be calculated based on different country’s rules and regulations.
Businesses in China must now ensure compliance with VAT policy changes as well as stay up-to-date with new VAT legislation being introduced over the next few years. They must also understand the VAT implications of their commercial activities and be prepared to take action to mitigate any potential VAT risks in a timely manner.
VAT policies in China are becoming increasingly complex and businesses will need to stay ahead of the curve if they want to remain competitive. With 2023 fast approaching, now is the time for companies operating in China to ensure that they have a strong understanding of VAT rules and regulations so that they can make informed decisions about their VAT strategies.
- Starting from January 9th, 2023, small businesses in China will receive financial support from the Ministry of Finance through the reduction of the Value Added Tax (VAT) rate from 3% to 1%. To be qualified as a small business, the monthly sales must not exceed the threshold of Yuan 100,000, which is equivalent to approximately US$ 15,000.
- Additionally, the State Taxation Administration announced that small-scale taxpayers who are required to pay the 3% VAT rate will only be obligated to pay a reduced rate of 1% for the year 2023, which also includes advance VAT payments.
- Furthermore, taxpayers operating in the “productive” sectors such as consumer services, telecommunications, education, postage, and others are eligible to receive an extra 5% VAT credit on input tax.
- Businesses operating in the “productive” sectors, such as consumer services, telecommunications, education, and postage, are entitled to a 5% VAT credit on their input tax.
- China will levy a 20% income tax for small firms with annual sales not exceeding 1 million yuan, effective from the start of 2023 to the end of 2024, the ministry said in a notice.
- Small firms to enjoy the lower tax – versus the standard 25% rate – need to have annual taxable income not exceeding 3 million yuan, a number of employees not exceeding 300, and total assets not exceeding 50 million yuan, the ministry said.
It is important to note that China has three standard VAT rates, which are 13%, 9%, and 6%. Please refer to the table below:
| Y2023 | ||
| Taxable income | Tax rate | |
| <RMB 1,100K | 5% | Taxable income *25% RATE 20% |
| < RMB 3,000K | 5% | Taxable income*25% rate 20% |
| >RMB 3,000K | 25% |
Bringing it all together
In conclusion, the VAT system in China is an important part of the country’s tax system and must be fully understood and complied with by foreign entities operating in the country. The recent changes to the VAT system have made it simpler and more efficient for businesses to operate, but it is important to stay up to date with the latest changes and ensure full compliance.
As a foreign entity operating in China, it is essential to have a thorough understanding of the VAT system and to ensure that you are fully compliant with all relevant regulations. This can be a complex and time-consuming process, but the team at FDI China is here to help.
At FDI China, our experienced professionals can assist you with all the necessary steps to ensure that you are fully compliant with VAT regulations, including calculating, reporting, and paying VAT accurately and on time. Whether you need help with compliance or have questions about the VAT system in China, we are here to help.
So, if you are a foreign entity operating in China and need assistance with VAT compliance, don’t hesitate to contact us. We are here to help you navigate the complexities of the VAT system and ensure that you are fully compliant.
