China’s organizations State Administration of Taxation (SAT), Ministry of Finance (MoF) and General Administration of Customs (GAC), recently introduced a series of amendments to China’s VAT system, in an ongoing effort to improve the business environment for companies operating in China, both local and foreign. This blog presents a brief summary of what the VAT system is, key timeline highlights and recent changes.
What is the VAT in China?
The Chinese VAT is a circulation tax levied on the added value at each phase of a product’s typical lifecycle. It exacts the deduction phase by phase so that the final tax is equal to the sum of the taxes on each production phase. VAT can be calculated with the following formula:
VAT Payable = Output VAT – Input VAT
The Output VAT is calculated based on total applicable sales/invoices raised, as a specified percentage of sale amount.
China’s VAT Timeline
- 1984. VAT was first introduced in China. The system was complex and had different rates and regional differences being applied.
- 2009. VAT transformed from a manufacture-oriented to consumption-oriented. Companies were allowed to deduct the input VAT on purchasing machinery and equipment from their output VAT.
- 2013. Business Tax to VAT Pilot Reform was extended to other parts of China.
- 2014. Pilot was further extended to the sectors of railway transportation, mail and telecommunications.
- 2015. Progress was steadily made with the Business Tax to VAT Reform and Excise Tax Reform. Resource Tax was reformed to be levied on an ad valorem basis.
- 2016. Business Tax to VAT Pilot Reform was extended comprehensively to cover all goods and services.
- 2017. VAT rates were simplified with the rate of 13% abolished, which led to a structure of VAT with 17%, 11% and 6%. The Provisional Regulations of Business Tax of the People’s Republic of China was abolished. The Provisional Regulations of VAT of the People’s Republic of China was revised.
- 2019. China announced several changes to the reform. The most important being:
- Reductions of VAT rate
- Adjustment to VAT refund rates
- The introduction of VAT super-credit
- VAT refunds pilot scheme for claiming excess input VAT credit
- Expansion of the creditable input VAT scope for Real Estate
- Allowing input VAT credits for Transportation Services
As such, to take full advantage and to minimise compliance risks, businesses will need to review their ERP systems, accounting processes and documentation within a short time period. IT Convergence can help you navigate the complexities of compliance in China and Asia Pacific. For more information on how to manage your ERP in APAC, visit our website.