Value Added Tax
As a type of turnover tax, value-added tax (VAT) is levied on the increased value of commodities at different stages of production or circulation, or on the value-added of commodities. All enterprises and individuals engaged in the sale or import of goods or the provision of processing, repair or maintenance services in China have to pay VAT.
(a) Taxpayer
In China, VAT payers are divided into general taxpayers and small-scale taxpayers on the basis of their operation scale and accounting and auditing system, with different methods of tax computation.
Small-scale taxpayers are taxpayers without a sound accounting and auditing system whose taxable value of sales is below the prescribed standards, namely Rmb1 million for taxpayers engaged in the production of goods or the provision of taxable services, and less than Rmb1.8 million for those engaged in wholesaling or retailing business.
General taxpayers mainly refer to enterprises whose annual taxable sales value exceeds that of small-scale taxpayers. Small production enterprises with a sound accounting and auditing system may be classified as general taxpayers. However, individuals, non-enterprise units, and enterprises that do not regularly engage in taxable operations are classified as small-scale taxpayers even if their annual taxable sales value exceeds the standards for small-scale taxpayers.
(b) Method of Computation
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Small-scale taxpayer
VAT payable by small-scale taxpayers is calculated by a simple method on the basis of the sales value and the tax rate without offset or deduction for input VAT. The applicable rate is 4% for commercial enterprises and 6% for other operations. The formula for the computation of VAT is as follows:
Tax payable = sales value x tax rate (4% or 6%)
VAT on consignment sale, sale of unredeemed goods by pawn shops and retail sale of duty-free goods by approved duty-free shops, is levied at a rate of 4% using the above simple method of computation regardless of whether it is paid by a small-scale taxpayer. For the sale of second-hand goods, VAT is levied at half of the tax rate of 4%.
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General taxpayer
The actual amount of VAT payable by general taxpayers is the excess amount of output VAT over input VAT. The formula for the computation of the tax payable is as follows:
Tax payable = current output VAT - current input VAT
Output VAT = sales value x applicable tax rate
If the current output VAT is smaller than the current input VAT, the amount that cannot be fully set off or deducted may be carried over to the following tax period.
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VAT on imported goods
VAT on goods imported by taxpayers is computed on the basis of the composite assessable value and the applicable tax rate without offset or deduction for input VAT. The formula for the computation of the tax payable is as follows:
Tax payable = composite assessable value x applicable tax rate
Composite assessable value = customs dutiable value + customs duty
For taxpayers importing taxable consumer goods, the consumption tax payable will be added to the composite assessable value.
(c) Taxable Items and Tax Rates
There are two VAT rates in China, a basic rate of 17% and a lower rate of 13%. The sale and import of the following commodities are subject to VAT at the lower rate of 13%: grains, edible vegetable oil, drinking water, heating, air-conditioning, hot water, coal gas, liquefied petroleum gas, natural gas, methane, coal products for domestic use; books, newspapers and magazines; feedstuffs, chemical fertilisers, pesticides, agricultural machinery, agricultural plastic sheeting; and other commodities as specified by the state.
(d) Export Tax Exemption and Rebate
China implements a zero tax rate on exports. There is no export-related tax. Subject to the types of products, tax payments made in respect of the stages preceding export will be partly or fully refunded.
(e) Special VAT Invoice
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General taxpayers may purchase special VAT invoices from the tax authorities. Small-scale taxpayers and non-VAT taxpayers may not purchase or use such invoices.
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General taxpayers selling taxable items must issue special VAT invoices to the buyer. However, for the sale of taxable items to consumers and the sale of duty-free goods or goods for export, no special VAT invoices have to be issued. It is also not mandatory to issue special VAT invoices for the sale of taxable items to small-scale taxpayers.
- Special VAT invoices that are not up to specifications may not be used to claim deduction or exemption for input VAT.
(f) Tax Liability and Payment Period
In the supply of goods or taxable services, the VAT liability arises on the day the taxpayer receives full payment for the transaction or obtains a payment voucher for the transaction. In the case of import goods, VAT liability arises on the day of customs declaration.
The payment period may be one day, three days, five days, ten days, fifteen days or one month, to be determined by the competent tax authorities based on the amount of VAT payable by the taxpayer.