1. Definition of VAT
Value Added Tax (VAT) is levied on all units and individuals engaged in the sale of goods, the provision of processing, repairs and replacement services within China, or the importation of goods into the territory of China.
2. Tax Rates
There are two types of taxpayers for VAT purpose: general taxpayers and small-scale taxpayers.
For general taxpayers, the VAT is levied at 17% on the turnover of the sales of goods and the provision of processing and maintenance services.
For small-scale taxpayers, with effect from 1 January 2009, VAT is levied at 3% on turnover derived.
With effect from 1 January 2009, the threshold for application for registration as a general VAT payer is reduced from RMB1 million to RMB0.5 million for manufacturing taxpayers, and from RMB1.8 million to RMB0.8 million for commercial taxpayers.
VAT tax rates vary according to the taxable activities / classification. The table below summarise the tax rates applicable to different businesses:
|Taxable activity / classification
|Sales of goods, processing, repair and replacement services, importation of goods
|17% (basic rate)
|Sales and imports of:
Food grains and edible vegetable oils;
Tap water, heating, cooling, hot water, coal gas, liquefied coal / charcoal products for residential use;
Books, newspaper and magazines;
Feed, chemical fertilizers, agricultural chemicals, agricultural machinery and plastic film for agricultural purposes; and
Other goods prescribed by State Council
|13% (reduced rate)
3. Tax Payable
(1) Tax payable formula for small-scale taxpayers
Tax payable formula for small-scale taxpayer is very simple. The input VAT is not deductible and any VAT paid on purchase would become the cost of good sold of small-scale taxpayers.
Tax payable = sales income x tax rate (3% with effect from 1 January 2009)
(2) Tax payable formula for general taxpayers
VAT payable = output VAT – input VAT
(3) Input VAT
Input VAT is the VAT paid or borne by taxpayers who purchase goods or receive taxable labor services. Normally, input VAT amount is stipulated in the VAT invoices when the general taxpayer buys goods from its domestic suppliers or shown on the custom duty payment certificates when the taxpayer imports goods from overseas suppliers.
Under some circumstances, input VAT is not creditable. The circumstances include:
(4) Output VAT
Output VAT is the VAT payable by taxpayers who sell goods or provide taxable labor services. Input and output taxes are calculated based on the value of the purchase and sales of the goods respectively.
The formula for output VAT is as follows:
Output VAT = turnover or taxable value x tax rate
The turnover includes all the amounts and additional charges (i.e. allowances, overdue payment interest, leasing fees for packaging materials and so on) charged to the buyers.
4. Calculation of VAT Rebates for Exports – “Exempt, Credit, Refund” (“ECR”) Method
The tax refund basis for export goods is very complicated. VAT refund for exported goods refers to a system of refunding the VAT already paid or payable in China to the exporter or granting VAT exemption to the exporter. This kind of VAT refund system is called the “Exempt, Credit, Refund” (“ECR”) method. In brief, the VAT payable of a general VAT taxpayer under the ECR method is determined by applying the following formula:
VAT payable = Output VAT on domestic sales – [Total input VAT – Non-exempted and non-creditable VAT]
Non-exempted and non-creditable VAT = (Export sales – bonded imports) x (VAT rate – applicable refund rate)]
Bonded imports refer to those imports of raw materials or merchandise which would be used for the manufacture of exported goods. Generally speaking, no customs duties and import VAT would be levied on bonded imports.
The prevailing output VAT rate for general taxpayers is 17% whereas the applicable refund rates vary for different products.
From the above formula, if an enterprise exports merchandises which enjoy higher VAT rebates, it will lead to a lower amount of Non-exempted and non-creditable VAT. This will result in a lower VAT payable. If the VAT payable is negative, this is a chance for applying for VAT refunds, subject to the applicable thresholds.
Please note that, in practice, the calculation of ECR is more complicated than the above formula as enterprises may conduct factory transfers or indirect export sales under which the merchandises are deemed exports for customs purposes whilst the same are physically transferred to another entity in China for further processing. From the administrative standpoint, the application of export VAT refunds needs to comply with the related PRC customs, tax and foreign exchange regulations as well as obtain the requisite documents. Otherwise, even though the merchandises have been physically exported, no export VAT refund is eligible.