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24.05.2019

China: New VAT policies for tax cuts

VAT reduction is expected to boost the development of China’s economy, especially the manufacturing sector

Key Facts
  • This is the sixth round of tax reductions since the replacement of business taxes by VAT in 2012.
  • Different reduction of VAT rates for general VAT taxpayers‘ sales activities or imports, agricultural products, export VAT refund rates and VAT refund rates for goods bought by visitors.
  • There are still some uncertainties, e.g. the process for input VAT credit for passenger transportation services and VAT refunds for unused VAT credit. The government is expected to release more detailed implementation articles or formalities in due course.

Background

The VAT reduction was first announced by Premier Li Keqiang in the government work report to the 13th National People’s Congress. After that, China’s State Administration of Taxation (SAT), Ministry of Finance (MOF) and General Administration of Customs (GAC) jointly issued Announcement [2019] No.39 to formally announce the massive reduction of VAT.

This is the sixth round of tax reductions since the replacement of business taxes by VAT in 2012. This VAT reduction is expected to boost the development of China’s economy, especially the manufacturing sector. 

Reduction of VAT rates

The adjustments are summarised below:

Types Old rates
(effective until 31 March 2019)
New rates
(effective from 1 April 2019)
VAT rates for general VAT taxpayers‘ sales activities or imports  16%
10%
13%
9%
Agricultural products 10%
12%
9%
10% (Note 1)
Export VAT refund rates  16%
10%
13%
9%
VAT refund rates for goods bought by visitors 11% 11% (Note 2)
8% (Note 3)


Notes:

  1. For those products used in production or consigned processing and subject to sales VAT at 13%.
  2. For goods taxed at 13%.
  3. For goods taxed at 9%.

Preferential policy for input VAT credit

  • The input VAT on immovable properties or immovable properties under construction can be credited at one time instead of over two years.
  • Expanded input VAT credit scope – The input VAT for domestic passenger transportation services may be credited.
  • Additional 10% deduction of input VAT – Qualified enterprises in production or livelihood services industries are granted a further 10% input VAT deduction for the period from 1 April 2019 to 31 December 2021.

VAT refund policy for unused VAT credits

Businesses can apply for a refund of unused VAT credits incurred since 1 April 2019, provided that certain criteria are met. The VAT refund amount is calculated as follows:

Refund = unused VAT credit × proportion of input VAT × 60%

  • Proportion of input VAT = (Input VAT + VAT receipt issued by customs + tax receipt accumulated from April 2019 to present) / total input VAT over the same period.

WTS observation

  • The new round of VAT reductions came into force on 1 April 2019, but there are still some uncertainties, e.g. the process for input VAT credit for passenger transportation services and VAT refunds for unused VAT credit. The government is expected to release more detailed implementation articles or formalities in due course. 
  • The tax burdens of many industries (e.g. manufacturing, transportation and construction, etc.) will be significantly reduced. Companies in these industries are advised to check their current and future contracts to manage the impact of this tax reduction. Further discussions with suppliers and customers will be necessary.
  • The policy provides for a transitional treatment (i.e. the applicable export VAT refund rates for the period prior to 30 June 2019).
  • Not all taxpayers can obtain a VAT refund – only those that have been awarded a good tax compliance rating. It sends a signal that compliance is paying off and that a good credit rating is something all operators should endeavour to achieve.
Main Contact
Martin Ng
Managing Partner
China
> View Profile
Main Contact
Maggie Han
Senior Manager (Tax/Finance)
China
> View Profile
Article published in WTS Global VAT Newsletter Q1/2019
Recent or expected changes in VAT and GST regulations and compliance duties in various EU and third countries
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