Value-added tax (VAT) is a tax system that is applied in many countries around the world, including China. 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. 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.
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)?
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?
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. Importing goods into China requires importers to pay VAT based on the cost of the imported goods and associated costs, such as transportation and packaging fees. The VAT rate varies depending on the product type and its intended use. In addition, all businesses must pay VAT on goods and services purchased within China to operate legally.
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. Check the table below for more details.
|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|
Obligations and regulations
It is important for businesses operating in China to understand their VAT obligations and ensure compliance with the relevant regulations. The obligations and regulations for VAT in China are listed below.
- 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.
It is important for businesses to stay up-to-date with any changes in VAT regulations and to maintain accurate records to avoid any penalties or fines for non-compliance.
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 Chinese VAT registration include the following.
- 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.
It is important to note that there may be exceptions or special rules depending on the industry or type of business.
Can Foreign Entities register as general VAT taxpayers in China?
Foreign entities 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.
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.
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.
Recent changes in policies
China has been making major changes to its tax policies since 2018, with the goal of fully transitioning to VAT by 2023. VAT is a type of tax on goods and services that has replaced the old business tax system. This has significant implications for businesses in China, as VAT is calculated based on the added value at each stage of production or distribution. For international trade, VAT has to be calculated according to the rules and regulations of different countries. Although these changes can be confusing for businesses, they are important to understand to ensure compliance with China’s tax laws.
- 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:
Bringing it all together
Value-added tax (VAT) is a tax added to goods and services during the production and distribution process in China. VAT regulations in China require businesses to register for VAT, issue invoices, maintain accurate records, and file returns and payments on a regular basis. The VAT rate varies depending on the product type and its intended use, with rates ranging from 3% to 13%. All businesses that engage in the sale of taxable goods and services in China must register for VAT with the local tax authority, issue VAT invoices, keep accurate records of VAT invoices issued and received, and file and pay VAT returns on a monthly or quarterly basis.
Tax authorities may conduct audits of businesses to ensure compliance with VAT regulations and rules.Keeping accurate records and timely filing of returns and payments can help avoid penalties and fines, so it’s a good idea to stay organized and stay on top of your VAT obligations. Additionally, it’s important to stay up-to-date on any changes to VAT rates or regulations, as these can impact your business and require adjustments to your tax strategy.