China’s Value Added Tax
BUSI 3001 SBLC
Week 6, Fall 2014
Charles Mo & Company
October 6, 2014
China’s VAT
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What is VAT?
History of China’s VAT
How does VAT work in China?
 What are taxable under VAT?
 Which agency administers the VAT?
 VAT tax rate
 How to calculate VAT?
 Types of VAT taxpayers
VAT Reform in time for the financial crisis
VAT Reform Implication
What is a VAT?
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A form of consumption tax
Buyer – VAT is included in the purchase price
Seller – is responsible for collecting the VAT and for paying to
the government the VAT collected. Also is only responsible for
the VAT on the added value to the product sold.
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Total Sales price = 234 Net Selling Price
= 200
Total Cost
= 117 Net Purchase price = 100
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Difference
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= 17 Profit
VAT collected (17%)
= 34
VAT paid in purchase(17%) = 17
= 100 Pay to government
= 17
What’s the difference between VAT and sales tax?
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Sales tax is also a consumption tax, but it is taxed once at the end to
the end user and the tax is collected and paid to the government
VAT is taxed each time a product is sold/the ownership is transferred
VAT is a national tax. Sales tax is usually administered by the state
China’s VAT history
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1984- China started an experimental VAT for 31 special products
applicable to domestic companies only, but not to FIEs (Foreign
Invested Enterprise)
December 13, 1993 - The State Council of China issued "The
Provisional Regulation of the People's Republic of China on Value
Added Tax“ , No. 134 formalizing VAT regulations.
November 24, 2006 - issued National Tax No. 156 – regulations of
the usage of specific VAT invoice.
November 5th, 2008 - Order No. 538 modified and replaced the old
No. 134.
January 6, 2009 - Finance Order No. 50 published a detailed
regulations of Order No. 538 (The VAT reform from 2008 Stimulus
Program became effective on January 1, 2009)
January 1, 2012 - Shanghai became the test site for the new VAT on
Transportation industry and certain service industries.
VAT is the major source of tax revenues in China
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In 2002, the revenue from VAT accounted for 47.61% of
the state total tax revenue.
In 2007, the revenue from VAT accounted for 33.9 % of
China's total tax revenues
In 2008, VAT is about 1/3 of the total tax revenues
In 2009 VAT, the largest single contributor to tax
revenues, rose by 3.8 percent to CNY1.88 trillion.
The VAT revenues are share between the central
government and the local government by a ratio of
75%:25%.
What are taxable under VAT?
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What kind of sales are subject to VAT?
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Domestic sales of all products (excluding intangible assets and real
estate)
Imported products
Domestic labor in value added manufacturing, repair, supplementary
repair services (i.e. processing and repairing services only),
Some service sales – Beginning January 1, 2012 service VAT is charged
on services rendered as a trial model in Shanghai
Who are subject to VAT and responsible for paying to the
government?
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Manufacturers
Retailers
Wholesalers
VAT Administration
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National tax
Administered by the State Administration of Taxation
Import VAT - collected by Customs on behalf of the Tax
Administration
VAT Revenue - shared between the central government
(75%) and local government (25%)
VAT tax rate on products
 17%
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Including the old mineral VAT which was only 13% under the
old rules.
13 % for the following products:
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Cereals and edible vegetable oils
Utility water, steam, coal gas, liquid gas, bio-gas, and residential coal
products
Books, newspapers, and magazines
Animal feed, fertilizers, pesticides, agricultural machinery, and
agricultural membrane
0% for export
New VAT on service industry
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Service industry
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Replacing the current enterprise tax at 5% by two VAT rates
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3% - less than 5 million annual revenue
6% - 5 m more annual revenue
Certain outsourced foreign service such as design service except for
real estate interior and exterior designs.
Certain outsourced service by foreign entities
Transportation VAT
How is VAT taxed?
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VAT is a tax that is levied based on the turnover of goods
and services provided by each taxpayer; it is not a tax
based on the taxpayer’s income.
Any person/entity engaged in sales of VAT taxable
transactions is responsible for collecting and paying the
VAT to the government, but the end users pay the VAT
on the goods and services.
Taxable transactions covered under the VAT are broad in
scope, and include the sale of imported goods. Article 1
of the VAT Regulations defines taxable goods to include
all items that can be moved from a seller to a buyer.
How to calculate VAT?
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VAT tax payable = same period OUTPUT VAT on sales –
same period INPUT VAT on purchased
items
If same period VAT on sales < same period VAT on
purchased items, unused VAT on purchased items can be
carried forward
VAT on sales = Sales * tax rate
If sales reported appears to be low for no reasonable
cause, the Tax Department will review and determine the
appropriate sales amount.
How to determine VAT paid on purchased items?
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The following VAT deductions are allowed:
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From the seller - VAT specific use invoice indicating the
amount of VAT tax amount
From the Customs Department - VAT specific use payment
book indicating the amount of VAT paid
For agricultural products: same as above but calculate the
13% VAT for purchased VAT deductions.
For transportation incurred during product sales or
manufacturing process - same as above, use 7% to calculate
the purchased VAT deductions(now 6%).
Must have VAT specific use invoice to be allowed to deduct
the purchased VAT.
Types of VAT invoice
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Specific Use VAT invoice
General Use VAT invoice
Types of VAT Taxpayer - Effective January 1, 2009
Small Scale Taxpayers –
manufacturing taxpayer with annual sales less than RMB
¥ 500,000; or
Wholesalers or retailers of goods with annual sales less than
RMB ¥ 800,000.
no credit or deduction is allowed for input VAT but only output
VAT at a lower rate of 3 percent for all entities.
Can apply for General scale if it can maintain a sound
accounting system and provide accurate accounting records for
taxation purposes
Types of VAT Taxpayer - Continued
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General taxpayers –
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Subject to VAT at 17 percent based on output VAT minus
input VAT.
Entities pay VAT on inputs and collect VAT on outputs. If the
VAT collected is greater than VAT paid, companies must
remit the balance owing. Exporters are eligible to apply for
refund on VAT paid. The refund rate is determined and
updated by State Administration of Taxation.
Types of VAT Taxpayer
General VAT Taxpayer
Small Scale VAT
Taxpayer
Cannot issue VAT Special
Use invoice
VAT Special Use
Invoice
Can issue invoice
Ordinary Tax
Invoice
Qualification
Can issue invoice
Can issue invoice
Licensed Accounting staff
Statutory accounting compliance
Sound accounting system
Security of the tax invoices
Sales< 0.5 m (production)
Sales<0.8 m (Wholesale or retail)
VAT Calculation
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General VAT Taxpayer (17%)
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Sales amount by producer
VAT tax
Total paid by wholesaler
Sales to retailers by Wholesaler
VAT tax
Total paid by retailer
Wholesaler owes VAT tax to government
=
=
=
=
=
=
=
100
17
117
150
25.50
175.50
8.50 (25.5-17)
Small VAT Taxpayer (3%)
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Sales amount by producer
VAT Tax
Total paid by wholesaler
Sales to retailers
Wholesaler owes VAT tax to government
= 100
= 3
= 103
= 150
= 4.5
Imported product VAT
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VAT on imported product =
(Customs determined price + Levied Duty +
excise tax) * VAT tax rate
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VAT on imported product is 17%
Specific Use VAT invoice not allowed in these situations
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Individual consumer
VAT exempt products
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Farmer’s agriculture product
Contraceptives
Antique books
Scientific research/educational imported equipment
Foreign government, international organization aids
Handicaps imported product
Sale of self used products
Small Scale VAT Taxpayer
VAT Reform – part of the Stimulus program in 2008
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Effective January 1, 2009
One of the 10 fiscal measures to address the global financial crisis
Announced on November 9, 2008 by the State Council
Part of the Economic Stimulus Plan amounting to 4 trillion yuan
On 11 November 2008, the Chinese Ministry of Finance ("MOF") and
State Administration of Taxation ("SAT") organized a press
conference, and revealed the details of the VAT reform.
Transformation from production based VAT to consumption based
VAT
14 November, the Xinhua News Agency released the amended
Provisional Regulations on VAT, Business Tax and Consumption Tax
approved by the State Council
Production Based Concept
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To offset sales, only direct costs attributable to production
are allowed, such as:
production materials,
wage payment and
factory expenses
VAT included in raw materials
Fixed assets purchased including the VAT are depreciated
over the life of the fixed assets.
This results in a delayed deduction of the VAT over a
longer period of time.
Consumption Based VAT
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After the reform, the input VAT on fixed assets
newly purchased by enterprises can be deducted
in full amount immediately.
As this move increase the VAT deduction or offset
against the VAT upon sales, the immediate benefit
is the reduced amount of taxable income. Thus the
policy reduces income tax; and it improves cash
flow.
Benefits of Consumption Based VAT
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Under the old production based VAT, the input VAT incurred on
the purchased of fixed assets is not allowed to offset against an
input VAT.
The input VAT would be capitalized as costs of fixed assets
and this creates the problem of multiple taxation.
The Transformation is not only aiming to reduce the tax burden
on investing on equipment, but also achieving multiple
objectives such as,
 encouraging domestic consumption,
 promoting advancement of technology,
 guiding structural developments and
 stimulate economic growth as a whole.
Applicable on new purchase of "equipment"
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The Transformation applies to "equipment" newly
purchased on or after 1 January 2009.
The scope of "equipment" covers
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machines, machinery and
means of transportation and
other equipment, tools and
utensils related to production and operation.
Real estate properties such as building and structural
improvements are not included in the scope.
Deduction for input VAT is specifically disallowed for the
purchase of small motor cars, motor cycles, and yachts
that are subject to Consumption Tax and could be used for
private purposes.
Carry-forward of excess input VAT
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If the amount of input VAT is greater than
the amount of output VAT charged on sales
within a VAT reporting period,
the excess input VAT can be used to offset
future output VAT. No refund of excess
input VAT shall be granted.
Reduction of VAT collection rate for small-scale VAT taxpayer
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The VAT collection rates for the small-scale commercial
enterprises (4%) and manufacturing and other
enterprises (6%) will be reduced to 3%.
Since these enterprises will not be benefited from the
Transformation which is only applicable to General-VAT
taxpayers, such VAT collection rate reduction policy is
introduced to alleviate their VAT burdens.
Also the MOF and SAT announced that the minimumincome thresholds for collection of VAT and Business
Tax will be raised to help the development of small
businesses.
Resumption of VAT rate of mineral products to 17% (from 13%)
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Mineral products have been subject to the reduced VAT
rate of 13% with the aim to stimulate development of
the mining industry.
As the Transformation will allow input VAT to be
recovered on equipment to be purchased by mining
businesses, the overall VAT burden could be
lowered. This, together with the goals to promote
resource conservation and environmental protection,
the VAT rate of mineral products will be shifted back to
the standard rate at 17%.
Import Taxes
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Composite Assessable Price
Consumption Tax
Duties
Applicable VAT
New VAT Reform Implication
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Amendments to the principles with regard to the Transformation and surrounding reform
are mentioned in the amended Provisional Regulations on VAT – announced
These amended Implementation Rules are aimed to be released by the end of this year.
The Chinese government is determined to withstand the turbulence of the current global
financial market while sustaining the economic growth.
Changes to the VAT system (e.g. the recent rounds of increase in export VAT refund rates
and the forthcoming Transformation) have been adopted as an integral part of its plan to
meet the objectives
The forecast on the budgetary impact due to the Transformation would amount to
RMB120 billion. The magnitude of the changes is reported to be the most significant
change on a single type of tax throughout the Chinese tax reform history so far.
It is apparent that the Chinese government now uses VAT regime to play an increasingly
important strategic role in the adjustment of the Chinese economy, rather than merely a
tax raising tool.
Continued
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This upcoming VAT reform is just a first step and the amendments to
the Turnover Tax regulations are the next. There should be more
massive and critical adjustments to VAT, and the other two Turnover
Tax systems in future.
According to statistics released by the Ministry of Finance, revenue
from VAT accounts for approximately 31% of China’s overall tax
revenue.
The Ministry of Finance estimates that VAT revenue to be collected
under the revised VAT Regulations will be reduced by more than
120,000,000,000 Yuan – approximately 17 billion U.S. Dollars.
In the long term, VAT reform will eliminate double taxation, which was
a major drawback associated with the production-based VAT model.
China Preident Xi Jing Ping and First Lady Peng Liyuan.
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China Premier, Li Ke
Qiang