New value-added tax rates in China will take effect on May 1, 2018. From then on, taxpayers originally subject to VAT rates of 17 percent and 11 percent will now be subject to rates of 16 percent and 10 percent, respectively. Taxpayers subject to the 6 percent VAT rate will see their obligations unchanged. Companies located in or doing business with China should pay attention to.
What is the scope of China’s VAT?
Value-Added Tax (VAT) is levied on both domestic and foreign enterprises in China on the transfer of taxable goods and services at each stage of the production process.
VAT is levied on sales by producers, wholesalers and retailers as well as at the retail level whereby goods and services are sold to the end consumer. Commercial activities known as “mixed sales activities” which involve the sale of goods and certain services may also attract either VAT or business tax liabilities.
New criteria on small-scale VAT taxpayer
Along with the VAT rate reductions, China will expand the criteria for businesses to qualify as small-scale VAT taxpayers. Small-scale VAT taxpayers benefit from lower VAT obligations, but are generally unable to issue special VAT fapiao.
Previously, there were three separate industry-specific tiers to determine small-scale VAT taxpayer status. With the changes, the three tiers will be unified into a single standard.
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Currently, all industrial and commercial businesses with an annual turnover of less than 5 Million RMB or 8 Million RMB respectively are considered as small-scale taxpayers. Now, these thresholds are both raised to 50 Million RMB. Also, businesses which have already registered as general taxpayers can apply, for a limited time, as a small-scale taxpayer.
Those already registered as general VAT taxpayers have the option to transfer to small-scale VAT taxpayer status until December 31, 2018, if they meet the criteria.
How is VAT calculated?
In respect of general taxpayers, VAT is calculated by deducting the amount of VAT paid on goods and services purchased by the taxpayers from the VAT on the sale of goods and services. If the total output VAT for the current period is less than the deductible input VAT, the balance may be carried forward and offset in later periods. Output VAT is calculated in RMB and may be collected by the taxpayer from the purchaser.
For sales value in foreign currency, the taxpayer must use the prevailing foreign exchange rate quoted by the State to convert the sales value into RMB.
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