China's value-added taxes (VAT) contribute a large percentage to China's annual tax revenue and account for a significant proportion of tax liabilities for many Chinese enterprises. China started to implement VAT in 1984 on 24 specified taxable items and on December 13, 1993, the State Council promulgated The Provisional Regulation of the People's Republic of China on Value-Added Tax with the intent of "unifying taxation management, equalizing the tax burden, simplifying the tax system, and guaranteeing financial revenue." This regulation, which codified China's VAT system, has been in use ever since.
In China, VAT is administered by the State Administration of Taxation (SAT)(import VAT is collected by the customs on behalf of the SAT), and the tax revenue, except import VAT, is shared between the Central Government (75 percent) and local governments (25 percent). VAT is the major source of fiscal revenue for the government of China, particularly the Central Government. In 2007, the revenue from VAT amounted to 15.47 billion yuan ($2.2 billion), accounting for 33.9 percent of China's total tax revenue for the year—it accounted for the largest percentage of China's annual tax revenues.
The Chinese Government rules that all enterprises and individuals engaged in the sale of goods, provision of processing, repairs and replacement services, and import of goods within China shall pay VAT. There are a few exemptions, such as self-produced agricultural products sold by agricultural producers, contraceptive medicines and devices, antique books, importation of instruments and equipment directly used in scientific research, experiment and education, importation of materials and equipment from foreign governments and international organizations as assistance free of charge, articles imported directly by the organizations of the disabled for special use by the disabled, and sale of goods which have been used by the sellers. However, pretty much every business will be liable for this tax.
The VAT rate for general taxpayers is 17 percent, or 13 percent for some goods (see table below). For taxpayers who deal in goods or provide taxable services with different tax rates, the sale amounts for the different tax rates shall be accounted for separately. If this is not done, the higher tax rate shall apply.
Taxable items Rate
Exportation of goods (except where otherwise stipulated by the state) (0% )
Agriculture, forestry, products of animal husbandry, aquatic products; edible vegetable oil and food grains duplicates; tap water, heating, ooling, hot air supplying, hot water, coal gas, liquefied petroleum gas, natural gas, methane gas, coal and charcoal products for household use; books, newspapers, magazines (excluding the newspapers and magazines distributed by the post department); feeds, chemical fertilizers, agricultural chemicals, agricultural machinery and plastic covering film for farming; dressing metal mineral products, dressing non-metal mineral products, coal Crude oil, mine salt and goods (13%)
other than those listed above, and services of processing, repairs and replacement (17%)
VAT calculation for general taxpayers
The VAT payable shall be the balance of output tax for the period, after deducting the input tax for the period. The formula is:
VAT Payable = Output VAT - Input VAT
Output VAT is calculated based on the value of the taxpayer's sales, namely, Output VAT = A × B, where A = sales value and B = tax rate.
A general taxpayer will usually purchase goods or receive taxable labor services during the course of doing business. The VAT paid by the general taxpayer is input VAT. The input VAT is used as a credit against the output tax levied on selling the goods.
VAT calculation for small-scale taxpayers
From January 1, 2009, the VAT thresholds for those enterprises that do not qualify for general taxpayer status have been amended. First, the sales threshold for small-scale taxpayers has been reduced from 1 million yuan ($147,060) and 1.8 million yuan ($264,700) to 500,000 yuan ($73,530) and 800,000 yuan ($117,650), respectively. And second, non-enterprise units and entities that normally do not engage in taxable activities are given the choice whether or not they are taxed as small-scale taxpayers while individual (natural person) taxpayers with business turnover exceeding the threshold shall continue to be taxed as small-scale taxpayers. The current VAT rate for small-scale taxpayers is 3 percent.
As previously noted, these are taxpayers whose annual taxable sales value falls below a certain level (500,000 yuan for enterprises engaged primarily in the production of goods or the provision of taxable services; 800,000 yuan for enterprises engaged in the wholesaling or retailing of goods).
Such taxpayers cannot deduct input VAT, so the formula is as follows:
VAT payable = Sales Value × Tax Rate (3 percent)
For the sale of goods or taxable services, VAT is incurred on the date when the sales sum is received, or documented evidence of the right to collect the sales sum is obtained. For imported goods, it is incurred on the date of import declaration.
VAT on imported goods is collected by China's customs on behalf of the tax authorities. VAT on articles for personal use brought or mailed into China by individuals is levied at the same time as customs duty.
The author is senior legal associate of Dezan Shira & Associates Beijing Office (www.dezshira.com).