A value-added tax (VAT) is a fee assessed against businesses at each step of the production and distribution process, usually whenever a product is resold or value is added to it. A VAT is levied on the difference between the purchase cost of an asset and the price at which it can be sold (i.e., the amount of value added to it). Producers and distributors typically pass the cost of the VAT on to the final consumer in the form of price increases. Tax is added to a product's price each time it changes hands until delivery to the customer takes place, when the final tax is paid.
Value-added tax falls under the general category of a consumption tax, meaning taxes on what people buy rather than on their earnings, savings, or investments. VAT has also been referred to as a sort of national sales tax, though it functions very differently. Sales tax is imposed on the total retail price of the item sold, while VAT tax is imposed on the value added at each stage of production and distribution. And though more complicated than sales tax, value-added tax systems have more checks against tax fraud because the tax is assessed at more than one point in the distribution process.
THE VAT ASSESSMENT PROCESS
The process of assessing value-added tax occurs roughly as follows:
- Manufacture adds value to a product; the amount of value added can be described as the difference between the cost of the materials used to make the product and the price charged to the customer (often a wholesaler).
- The manufacturer pays value-added tax (a percentage of the value added), which is then included in the purchase price charged to the customer (wholesaler).
- The manufacturer gets a rebate from the government for VAT paid on the materials.
- The customer (wholesaler) pays a VAT on the value they add, which can be described as the difference between what they paid to the manufacturer and the price at which they sell it to their customer (retailer). This VAT amount is included in the price charged to the retailer.
- The wholesaler gets a rebate from the government for the VAT paid to the manufacturer.
- The retailer pays value-added tax on the value they add, which can be described as the price charged to customers less the wholesale cost, and includes the VAT in the final sales price of the product.
- The retail store collects value-added tax from the person buying the product (retail price thus includes all VATs collected at each stage of this process) and gets a rebate for the VAT paid to the wholesaler.
Value-added tax is a primary source of tax revenue in many European and other developed countries. With the exception of the United States, all countries of the Organization for Economic Cooperation and Development (OECD) use a VAT or similar tax on consumer expenditures. Though a value-added tax system has not been extensively used in United States, some presidents have examined the idea.
HISTORY OF VALUE-ADDED TAX
Value-added tax was first suggested in Germany during the post-World War I period as a replacement to the country's turnover tax. The turnover tax was similar to the value-added tax system but did not provide rebates for the taxes paid at each stage. Other proponents of VAT suggested that the United States adopt it as a substitute for excise taxes imposed after the War. However, it was not until 1953 that the value-added tax system was put in place in the United States or Europe. That year, Michigan adopted a modified VAT, termed a Business Activities Tax, and used the system for fourteen years. France was the first country to begin using value-added tax to partially replace its own turnover tax system.
In 1967 the Council of European Economic Community (EEC) issued directives for widespread adoption of value-added tax to replace existing turnover taxes and link EEC members with a common tax system. The Council also hoped the new system would increase foreign trade, which was hindered by the complex regulatory practices of the turnover tax system. After the directive, countries outside the EEC such as Austria, Sweden, Brazil, Greece, and Peru also adopted some variation of the VAT, either in addition to or as a replacement for their own national tax structures.
A 1983 U.S. News & World Report article titled “What's Wrong with the System?” examined alternatives to the current tax system in the United States, citing problems such as complexity of tax laws, the expense of hiring professionals to prepare tax documents, and IRS backlog. One of the cited alternatives was value-added tax, by then widely used across Europe and other developed countries.
VATs continued to spread throughout the world during the 1980s, 1990s, and 2000s. China, Thailand, the Philippines, and Bangladesh all implemented the policy during the mid-1990s, and a value-added tax was introduced in many eastern European countries and former Soviet republics following the fall of communism. By the early 2000s, VAT had become a key component of the tax systems in more than 120 countries, with tax rates varying from 5 to 25 percent. Writing in Finance and Development, Liam Ebrill claimed that “the rapid rise of the value-added tax was the most dramatic-and probably most important-development in taxation in the latter part of the twentieth century, and it still continues.” Schenk and Oldman wrote in 2007: “The VAT has spread around the world more quickly than any other new tax in modern history.” The major exception to this trend remains the United States, which continues to operate without a VAT.
CHARACTERISTICS OF VALUE-ADDED TAX
There are three types of value-added tax used around the world, each different in the ways that taxes on investment (capital) expenditures are handled. The most common is the consumption method, which allows businesses to immediately deduct the full value of taxes paid on capital purchases. The second is the net income method, which allows gradual deduction of VAT paid on capital purchases over a number of years, much like depreciation. The third type, gross national product method of value-added tax, provides no allowance for taxes paid on capital purchases. The name of this type of tax is derived from the fact that the tax base is approximately equal to private GNP. The consumption method is most favored among general populations because it most equally taxes income from labor and capital and promotes capital formation.
In theory, value-added tax systems with a uniform rate are neutral to all forms of productive input. However, countries across the world have had to modify the VAT system with multiple rates and exemptions to meet political, economic, and social needs. Most nations do not assess any tax on necessities such as food, medicine, and shelter. And because of the difficulty in computing value added, professional services such as banking, accounting, and insurance are often exempt. The largest variation from uniform tax rates is the zero tax rate on exports. Since taxes will likely be assessed at a product's destination, many do not impose a tax on the final selling price of exports. To compensate, the VAT is applied to imported products. Working together, countries seek more balanced trade.
IMBALANCES IN THE VAT SYSTEM
Financial services have traditionally been exempt from value-added tax because no one has found a systematic, easy way to tax these services, partially because of the difficulty in determining the nature of services provided. Also, some wonder if it is fair to charge a tax on services often related to saving and investment.
Though some services are exempt from value-added tax, they must still pay the VAT on expenses such as office equipment; additionally, these business are ineligible for rebates on the VAT they pay. Therefore, exempt business sectors pay the total VAT on any good and service purchased. Often the cost of paying value-added tax is rolled into fees charged for the services offered. As a result of this imbalance, competition becomes greater, as companies can import services tax free, instead of buying services from a company whose price probably is inflated to absorb some or all of the hidden VAT taxes paid.
To remove such distortions in the economic effect of a value-added tax, a new method of taxing financial services would need to be devised. If these services were no longer exempt from value-added tax, they could reclaim prepaid VATs on equipment, etc., but they would also be required to charge VAT on any services offered. What complicates the matter further is categorizing which services are
performed specifically on a customer's behalf and which are performed on the institution's behalf. Additionally, services performed for the institution as a whole still indirectly benefit consumers. These issues make for murky ground when computing the value a service provider should be taxed upon.
The benefit of staying with the current system is that people are accustomed to it. The option of charging VAT to financial services means added resources must be committed to changing existing VAT coverage and finding a way to measure value added for financial institutions. A third option is to look for a distinct way of taxing services while remaining under the value-added tax system. As an example, the European Commission was exploring the idea of taxing services on a cash-flow basis, taxing cash movement.
THE BENEFITS OF VALUE-ADDED TAX
One of the best reasons for instituting a value-added tax, according to VAT proponents, is that the system encourages personal savings and investment-principal elements of a healthy economy-by taxing only consumption. In the current United States tax structure, citizens pay taxes twice on money they save-once when income tax is withdrawn from their paycheck, and again when they pay taxes on the interest earned from savings and gains from investments. Similarly, the tax system in place in the United States encourages corporations to use debt financing, in which interest payments made by the company are tax deductible. Any dividends earned are subject to double taxation. And because taxes on capital purchases cannot be immediately deducted (only later as depreciation expense), the costs of capital investment increase. If a company does have a large asset base, it must generate more income to increase investor returns, subjecting itself again to higher tax payments.
Another benefit touted by VAT supporters is a more constant revenue flow. Tax revenues under the current U.S. structure rise and fall as a result of changing economic conditions, decreasing during recessions and growing during an economic boom. During recessionary periods, revenues may fall enough that government financial requirements utilize all available funds, and economic recovery becomes further delayed. Proponents of value-added tax believe it results in more financial stability and revenue flow.
Supporters of VAT for the United States view the system as a supplementary tax that could help make up for revenue lost due to personal income taxes, and believe imposition of a VAT may also result in general lowering of income-tax rates. They also assert that items such as food, medicine, and shelter should be exempt (as they are in other countries with a value-added tax structure) in order to maintain fair practices for those who must expend the majority of their income on basic necessities. It would also mean people who save and invest money realize benefits. Finally, VAT advocates maintain that the current tax system in the United States cannot raise sufficient revenue to support minimal government expenses.
A value-added tax would in theory eliminate the need for federal tax expenditures, which are largely responsible for depletion of federal revenues and increases in the national debt. Also, since the VAT is a consumption tax, people will be more motivated to save and invest disposable income. Additionally, a VAT would in some way reduce bias toward those who earn higher incomes. Tax write-offs can usually be taken advantage of only by those who itemize,—meaning that they are available only to a small percentage of U.S. citizens, usually those with the highest incomes.
DRAWBACKS OF VALUE-ADDED TAX
Dropping the current tax system in the United States in order to adopt a VAT would require additional taxes on state and local services and products as well. Because value-added tax is similar to implementing a national sales tax, it impinges on territory currently occupied by states and local governments, and could add to the expenses incurred by cities and states by making them responsible for collection and enforcing compliance to the VAT system. It would require that every state rewrite its tax code, and could also add another tax layer for cities already charging state and local sales taxes. And while some cities could benefit from nontaxable export sales, others that depend primarily on domestic industry could face large losses in sales, resulting in declining revenues and lost jobs.
The prospect of a value-added tax also raises questions such as: Which goods and services purchased by cities would be federally taxed? Which provided by cities would be federally taxed? There would be no provisions for tax-exempt municipal bonds, which could mean an increase of up to 30 percent of finance costs for some municipalities. Deductions for state and local taxes, mortgage interest, investment in enterprise zones, housing, and jobs would also be eliminated. And cities with citizens who have less disposable income could stand to lose significant revenues with a consumption tax, revenues that would affect the public infrastructure and its investment in schools, roads, and utilities. VAT critics feel a de facto national sales tax will also reduce the amount of local funding states can expect from the local sales tax.
Because those with higher incomes spend a lesser proportion of their total wealth on consumption, households with lower income would still realize disadvantages and pay more tax proportionately than those who make more.
However, adjustments can be made to value-added taxes so that taxation of food, housing, clothing, and medicine are given a zero or low tax rate. Also affecting citizens with lower incomes would be the fact that charitable contributions would no longer be deductible expenses.
Adding to the drawbacks, some economists feel that instituting a value-added tax would result in increasing prices and, as a result, inflation. U.S. economists have estimated the net effect of a VAT implementation as a 5 percent price increase. Also, assumptions that administrative costs would decrease with a value-added tax system may be erroneous. VAT-compliance costs to business would be higher, especially with special exemptions and multiple rate levels to consider. And the VAT would not eliminate income or payroll taxes completely, meaning the VAT would only add to administrative costs incurred.
A fairly recent complication in the administration of VAT systems involves electronic commerce. Though the sales of online retailers accounted for an ever-increasing percentage of overall sales of software, videos, and music, such sales were not subject to VAT. Governments in the EU and elsewhere planned to implement a VAT for electronic commerce in order to protect traditional retailers from unfair competition and create a new source of revenues. “New technologies are steadily drawing VAT into the realms of competition between tax regimes and presenting its architects with the problem of how legislation can be redesigned to reflect previously unimagined transactions, while preserving neutrality with the existing ones,” Graeme Ross wrote in International Tax Review.
VAT IN THE UNITED STATES
Though the concept of value-added tax has met with considerable success outside the United States, U.S. policy makers have not yet warmed to the idea. The topic has been debated by economists since the post-World War I period but attracts only mild, sporadic support. The suggestion to adopt a VAT policy in the United States has been formally proposed numerous since the early 1970s. Supporters are firmly convinced problems with the existing tax structure could be corrected with its adoption through the generation of revenues and subsequent stimulation of production.
Michigan is the one state in the United States that has used a form of the VAT, called the Single Business Tax (SBT). This tax was adopted in 1975, replacing eight different business taxes then in use. Michigan repealed this tax, effective January 1, 2008, when the state legislature approved a 2006 voter initiative to repeal the SBT. The state replaced this tax with a tax on business income.
Although the United States does not have a VAT or a national sales tax, many U.S. businesses must take the VAT into account. As the authors of Value Added Tax: A Comparative Approach (2007) point out, “a U.S. business operating in or shipping goods or transferring services to developed or developing countries with VATs must consider the VAT implications of exports to or imports from those countries.” Supporters of a U.S. VAT point to this fact, and also argue that the U.S.'s large trade deficit could be reduced by using a VAT system. As provided by the General Agreement on Tariffs and Trade (GATT), prices for export goods can be discounted for some taxes, but not for income and social security taxes. But countries that use the VAT system can reduce prices by the total amount of VAT paid, giving them an economic advantage over the corporate and payroll taxes U.S. firms must pay. By adopting a VAT system and reducing the level of corporate, income, and payroll taxes, the United States could increase its export volume because U.S. firms could charge competitively low prices.
The idea of a national VAT continues to have supporters in the U.S. As recently as 2006, the Congressional Research Service (CRS) prepared a report on the benefits of imposing a VAT in the United States. The report noted that five bills had been introduced between 2005 and 2007 to levy some kind of VAT in the United States. However, President Bush's tax commission, charged with considering reforms to the U.S. tax system, rejected the idea of a national sales tax and expressed doubt over the use of European-style VATs. Although the idea of a VAT in the United States is most likely here to stay, it seems as though the United States will not be fundamentally altering its taxation system any time soon.
Bickley, James. “Value-Added Tax: A New Revenue Source?” Congressional Research Service, 22 August 2006. Available from: http://opencrs.com/rpts/RL33619_20060822.pdf.
Ebrill, Liam, et al. “The Allure of the Value-Added Tax.” Finance and Development, June 2002.
“Get the VAT Out: Tax Refund.” U.S. News & World Report, 28 April 1997.
Hooper, Paul, and Karen A. Smith. “A Value-Added Tax in the U.S.: An Argument in Favor.” Business Horizons, May-June 1997.
“Introduce VAT to Halt Sales Tax War Among States.” Business Line, 19 May 1999.
Ogley, Adrian. Principles of Value-Added Tax-A European Perspective. International Information Services, Inc., 1998.
Ross, Graeme. “Indirect Taxation-Designing Its Future.” International Tax Revenue, October 2004.
Scott, Andrew. “Taxing Financial Services: A Future with Options.” OECD Observer, January 1999.
“What's Wrong with the System?” U.S. News & World Report, 18 April 1983.
"Value-Added Tax." Encyclopedia of Management. . Encyclopedia.com. (June 17, 2019). https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/value-added-tax
"Value-Added Tax." Encyclopedia of Management. . Retrieved June 17, 2019 from Encyclopedia.com: https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/value-added-tax
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A value-added tax (VAT) is a fee that is assessed against businesses by a government at various points in the production of goods or services—usually any time a product is resold or value is added to it. In many countries this tax is referred to as a Goods and Services Tax (GST). Value is added to a product or service whenever the value increases as a result of the application of a company's factors of production, such as labor and equipment. VAT must be paid by every company that handles a product during its transition from raw materials to finished goods. For example, tax is charged when a manufacturer sells to a wholesaler and again when a wholesaler sells to a retailer.
In calculating the VAT, the taxable amount is based on the value added at each stage of the process of producing goods and bringing them to market. As an example, say that a company that makes socks buys cotton yarn for $1,000; adds $500 to its value in terms of labor, depreciation of knitting machines, and profits; then sells the completed socks for $1,500. VAT would be calculated as a percentage of the $500 value added by turning cotton yarn into socks. Of course, the sock company would also get credit for the amount of VAT it paid on the purchase of inputs, like cotton yarn.
In general, the total VAT accrued during the production of goods is reflected in the price of items sold to final consumers, because each reseller along the way usually passes along its VAT costs. In this way, VAT is somewhat similar to a national sales tax, and the two forms of taxation are often compared by governments. Experts claim that VAT entails higher administrative costs but is easier to enforce than a national sales tax.
The concept of VAT was first adopted by France in 1954. By 2005, there were more than 130 countries around the world that had implemented a VAT or GST. In most cases, the percentage of tax charged varies based on the necessity of the particular product, so the tax on food would generally be less than the tax on luxury items like boats. The United States is the only member country of the Organization for Economic Co-operation and Development (OECD) that does not have a value-added tax. According to the OECD, countries with a VAT collect on average one-fifth of their total tax revenue through this tax.
In recent years, VAT has been proposed for use in the United States as a way to simplify business and personal income tax laws. Proponents claim that VAT would replace other forms of taxation and reduce the costs of tax compliance. In fact, some people say that adopting VAT would eliminate tax returns for individuals and make the Internal Revenue Service obsolete. On the other hand, opponents argue that VAT would be more complicated to implement than other tax-reform options, such as a national sales tax. They also worry that it would increase the cost of food, medicine, and other necessities, which would hurt the poor.
VAT AND E-COMMERCE
VAT is a common form of taxation in the European Union (EU). In fact, VAT rates are as high as 25 percent in some EU countries. In 2000, a group of these countries proposed implementing a VAT for online businesses. The proposed tax would cover all digital products including software, videos, and music downloaded over the Internet in member countries. Since the products of electronic retailers were not previously subject to VAT, EU leaders felt that these businesses gained an unfair advantage over domestic, brick-and-mortar retailers. In addition, they argued that the EU nations were being deprived of tax income on goods sold in their countries by what were essentially foreign corporations.
As E-commerce expands in popularity, it may create hardships for some traditional retailers. As these brick-and-mortar businesses earn lower profits and hire fewer employees, they are likely to generate less tax revenue for their governments. If the new Internet competitors were based in the same country, then the tax situation would likely balance out. But the nature of online businesses often means that they can locate anywhere with sufficient technology and telecommunications capacity. Experts predict that increasing numbers of Internet businesses will base their operations in countries where taxes are low. Some low-tax jurisdictions, like Bermuda, have begun to enact favorable laws to attract such businesses. "Thus governments have to face the prospect of permanent flows of taxable profits out of their jurisdictions," Christine Sanderson wrote in International Tax Review. "Taking a European view, there is clearly a potential issue for tax authorities, since E-commerce and Internet development is likely to mean a flow of tax profits away from Europe."
The basic problem facing EU leaders is to determine how to apply VAT laws—which were developed with physical products and traditional retail markets in mind—to new types of goods and services delivered over the Internet. In 2000, representatives of 29 countries convened to develop the Ottawa Framework for dealing with these issues. Although the guidelines have not been finalized, they are expected to bring a higher level of certainty and consistency to the tax situation for E-commerce.
"EU to Consider Internet Tax." eWeek. 23 October 2000.
"International VAT/GST Guidelines." Organization for Economic Co-operation and Development. Available from http://www.oecd.org/LongAbstract/0,2546,en_2649_201185_36177872_119820_1_1_1,00.html. Retrieved on 2 May 2006.
Sanderson, Christine. "EU Forges Ahead on E-Commerce." International Tax Review. September 2000.
Tagliabue, John. "From Europe, Creative Taxation." New York Times. 28 September 2000.
Hillstrom, Northern Lights
updated by Magee, ECDI
"Value-Added Tax." Encyclopedia of Small Business. . Encyclopedia.com. (June 17, 2019). https://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/value-added-tax
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value-added tax (VAT), levy imposed on business at all levels of the manufacture and production of a good or service and based on the increase in price, or value, provided by each level. Because the consumer ultimately pays a higher price for the taxed commodity, a VAT is essentially a hidden sales tax. Originally introduced in France (1954), it is now a major part of the tax structure of most Western European nations. In the early 1990s the U.S. government considered instituting a VAT to fund national health care programs.
"value-added tax." The Columbia Encyclopedia, 6th ed.. . Encyclopedia.com. (June 17, 2019). https://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/value-added-tax
"value-added tax." The Columbia Encyclopedia, 6th ed.. . Retrieved June 17, 2019 from Encyclopedia.com: https://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/value-added-tax
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"value-added tax." World Encyclopedia. . Encyclopedia.com. (June 17, 2019). https://www.encyclopedia.com/environment/encyclopedias-almanacs-transcripts-and-maps/value-added-tax
"value-added tax." World Encyclopedia. . Retrieved June 17, 2019 from Encyclopedia.com: https://www.encyclopedia.com/environment/encyclopedias-almanacs-transcripts-and-maps/value-added-tax
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val·ue-add·ed tax (abbr.: VAT) • n. a tax on the amount by which the value of an article has been increased at each stage of its production or distribution.
"value-added tax." The Oxford Pocket Dictionary of Current English. . Encyclopedia.com. (June 17, 2019). https://www.encyclopedia.com/humanities/dictionaries-thesauruses-pictures-and-press-releases/value-added-tax
"value-added tax." The Oxford Pocket Dictionary of Current English. . Retrieved June 17, 2019 from Encyclopedia.com: https://www.encyclopedia.com/humanities/dictionaries-thesauruses-pictures-and-press-releases/value-added-tax
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3 Value-Added Tax
Value-added tax (VAT) is levied based on the value-added content that is realized in the course of production, during the sale of goods, or during the provision of services. Many nations around the world favor the use of this tax. The Provisional Regulations of the People's Republic of China on Value-Added Tax currently in force in China was promulgated by the State Council on December 13, 1993, and became effective on January 1, 1994.
VAT is administered by the State Administration of Taxation (SAT)—at the importation stage, it is collected by Customs on behalf of the SAT. Revenue collected from VAT is shared between the Central Government and the local governments.
This tax is the main source of fiscal revenue for the Government of China, particularly the Central Government. In 2003, revenue collected from VAT totaled 806.82 billion yuan, accounting for 39.9% of the country's total tax revenue, which is the largest single source of tax revenue.
Entities and Activities Subject to VAT
- State-owned enterprises, collective enterprises, private enterprises, enterprises with foreign investment, foreign enterprises, joint-equity enterprises, and other enterprises.
- Administrative units, institutions, military units, social organisations, and other units.
- Individual business operators, and other individuals engaged in the sale of goods, the importation of goods, the provision of processing, and repair and replacement services (hereafter referred to as taxable services).
Sale of Goods
The following activities conducted by enterprises, units, or individuals are deemed to constitute the sale of goods:
- Passing goods to others for sale on behalf of the enterprise, unit, or individual.
- Selling goods on a commission basis.
- Delivering goods from one establishment to another for sales purposes if they present their accounts on an accounting basis (unless the two related establishments are located in the same county or city).
- Using goods that have been self-manufactured or processed by contract as non-taxable items for collective welfare or for private consumption.
- Using goods that have been self-manufactured, processed by contract, or purchased as investment, by providing the goods to other enterprises, units, or individual businesspersons, by distributing the goods to shareholders, or investors, or by donating to others free of charge.
If a sales activity involves both goods and non-taxable labor services (e.g., the selling and transportation of goods), the activity is termed a mixed sale.
Mixed sales arising from goods manufacturing, wholesaling and retailing (including activities centered on goods manufacturing, and wholesaling and retailing, and concurrently tied to non-taxable services) are deemed to constitute the sale of goods, so the total sales revenue earned from such activities is subject to VAT.
Business Tax is levied instead of VAT on the mixed sales of other enterprises, units, and individuals.
For VAT payers concurrently engaged in non-taxable labor services, the sales value of goods, taxable services, and non-taxable services should be accounted for independently (hereafter referred to as sales value). If the taxpayers fail to account for the various sales values separately or precisely, the relevant tax authorities will require the taxpayers to pay VAT on their taxable and non-taxable services, as well as on their goods, and the tax rate levied on the non-taxable services will be the highest one applicable.
In the case of businesses leased or contracted to others, the leaseholders or the contractors will be the taxpayers.
For overseas units or individuals that sell taxable services in China but that do not have establishments in China, their VAT payable shall be taken up by their agents. If they have no agents, the purchasers shall act as the withholding agents.
At present, VAT revenue in China comes mainly from state-owned enterprises, collectively-owned enterprises, joint-equity enterprises, and enterprises with foreign investment that are engaged in the manufacturing industry,1 mining, power generation and supply, wholesaling and retailing, and the importation of goods.
For a quick reference guide to the items that are subject to VAT and the rates applicable, please see Table 3.1.
1 This comprises mainly tobacco production, food processing and production, textiles, petroleum processing, chemical raw materials and chemical production, the ferrous metal smelting and extension industry, the transportation equipment manufacturing industry, the electrical machines and apparatus manufacturing industry, and the electronic communications equipment manufacturing industry.
|Table 3.1 VAT taxable items and rates|
|Taxable items||Scope||Rate (%)|
|1. Exported goods||All types of exported goods, except for some exempted goods (such as gold, platinum, rare metal ores, steel billets, ingots, electrolytic aluminum, metal alloys, crude oil, raw wood, natural graphite, coke, coking coal, phosphorus, carbonide calcium, urea, cashmere, eel fry, and certain goods exported in aid of foreign countries), and goods prohibited by the Central Government from exportation (such as natural bezoar, musk, copper, copper alloys, etc.).||0|
|2. Agricultural products||Grains, vegetables, tobacco (excluding re-cured tobacco), tea (including all types of bud tea), horticultural plants, herbs, oil plants, fiber plants, sugar plants, forestry products, other plants, aquatic products, animal husbandry products, animal skins, animal hair, and other animal tissues.||13|
|3. Grain re-products||Noodles, dumpling wrappers, wonton wrappers, flour wrappers, ground rice.||13|
|4. Edible vegetable oils||Sesame seed oils, peanut oils, bean oils, vegetable seed oils, sunflower oils, cottonseed oils, corn embryo oils, tea oils, pepper sesame oils, and oil blends made from any combination of the above.||13|
|5. Tap water||13|
|6. Heating air, hot air, hot water, cool air||Heating, hot gas, and hot water produced and recovered through the use of industrial residue heat.||13|
|7. Coal gas||Charcoal gas, generating coal gas, and liquefied petroleum gas.||13|
|8. Liquefied petroleum gas||13|
|9. Natural gas||Gas-well natural gas, oil-well natural gas, coal-well natural gas, and other natural gas.||13|
|10. Methane gas||Natural methane gas and artificial methane gas.||13|
|11. Coal products for residential use||Ball coal, cake coal, honeycomb briquets, and kindle carbon.||13|
|12. Books, newspapers, magazines||Excludes newspapers and magazines issued by post offices.||13|
|13. Feed||Single feeds, mixed feeds, and compound feeds. Excludes grain and feed additives used directly for raising animals.||13|
|14. Chemical fertilizers||Nitrogenous fertilizers, phosphate fertilizers, potash fertilizers, compound fertilizers, trace element fertilizers, and other fertilizers.||13|
|15. Agricultural chemicals||Pesticides, bactericides, weed killers, plant growth supplements, plant chemicals, micro-organic chemicals, health chemicals, and other crude agricultural chemicals, and the preparation of agricultural chemicals.||13|
|16. Farm machinery||Tractors, ground-flattening machinery, machinery for farmland infrastructure construction, planting machinery, machinery for plant protection, harvest machinery, fieldwork machinery, irrigation machinery, machinery for agricultural by-product processing, agricultural transportation machinery (excluding vehicles for agricultural use), animal husbandry machinery, fishery industry machinery (excluding motored vessels), forestry industry machinery (excluding forestry cutting machinery and logging machinery), small farming tools (excluding agricultural machinery parts).||13|
|17. Farm plastic film||13|
|18. Dressing metal mineral products||Ferrous metal ores and non-ferrous metal dressing ores.||13|
|19. Dressing non-metal mineral products||13|
|20. Coal||Crude coal, washed coal, and coal preparation.||13|
|21. Crude oil||Natural crude oil and artificial oil.||17|
|22. Mine salt||17|
|23. Other goods||Goods sold or imported apart from the abovementioned goods.||17|
|24. Processing, repair, and replacement services||17|
Adjustments to the VAT rates are sanctioned by the State Council.
If a taxpayer deals in both goods and taxable services that are subject to different VAT rates, then the sales values of the two categories should be accounted for separately. Otherwise, the tax department will charge the higher rate.
The following enterprises or individuals are classified as normal taxpayers.
- Taxpayers engaged in the production of taxable goods or provision of taxable services, or taxpayers engaged mainly in the production of taxable goods or provision of taxable services (i.e., the sales value of this portion of their business exceeds 50% of the total for the year), and concurrently engaged in the wholesaling or retailing of taxable goods with an annual sales value of more than 1 million yuan.
- Taxpayers engaged in the wholesaling or retailing of taxable goods with an annual sales value of more than 1.8 million yuan.
In addition, some small taxpayers satisfying certain statutory criteria may be classified as normal taxpayers.
To compute the VAT payable, normal VAT payers should calculate separately the output tax and input tax for the period. The balance of the output tax remaining after deducting the input tax shall be the actual amount of tax payable.
Tax payable = Output tax payable for the period – Input tax for the period
A shop has an output tax of 1.7 million yuan and an input tax of 1.3 million yuan for the month.
Tax payable = 1.7 million yuan – 1.3 million yuan = 400,000 yuan
Taxpayers Selling Goods or Taxable Services
For these taxpayers, the output tax shall be the VAT computed and charged to the purchasers on the basis of the sales values and applicable tax rates.
Output tax = Sales value × Applicable tax rate
A steel company sells to a machinery company a quantity of steel worth 5 million yuan. The applicable VAT rate is 17%.
The output tax charged to the machinery company by the steel company is computed as follows:
Output tax = 5 million yuan × 17% = 850,000 yuan
Sales Value and Output Tax
The sales value shall include the total price and non-price charges (including commissions, subsidies, funds, pooled resources, profit repayments, prizes, indemnities, interest on delayed payments, package charges, rentals for package materials, storage charges, good-quality charges, transportation and loading/unloading charges, payments received/made on behalf of the taxpayers, except otherwise regulated by the State) received from the purchasers by the taxpayers through selling goods or taxable services.
Taxpayers shall compute the output tax for the period based on the sales value, and collect the tax payable from the purchasers in addition to the payment for goods and services.
If the sales prices of the goods and services are tax-inclusive, taxpayers shall base the tax-exclusive sales value on the following formula:
Tax-exclusive sales value = Tax-inclusive sales value ÷ (1 + Applicable tax rate)
A bookstore has sales revenue of 1.13 million yuan (VAT included) for the month. The applicable rate is 13%.
Tax-exclusive sales value = 1.13 million yuan ÷ (1 + 13%) = 1 million yuan
Output tax = 1 million yuan × 13% = 130,000 yuan
Exchange Rate Conversions
The sales value shall be computed in yuan. Sales values settled in foreign currencies shall be converted into yuan at the foreign exchange rate quoted by the People's Bank of China that is prevailing on the date, or on the first day of the month in which the sales take place (or the rate derived according to relevant regulations).
Taxpayers shall determine in advance the conversion rate to be adopted. Once the rate has been determined, no change is allowed for one year.
Deemed Sales Value
If the prices of the goods and services are noticeably low, and the taxpayers can offer no reasonable justification, or if there is no sales value for the deemed sales of goods, the tax department may determine the sales value according to the average sales price of similar goods sold by other taxpayers in the same month, the average sales price of similar goods sold in recent months, or the composite assessable price. VAT shall be computed and paid on the basis of the sales value thus determined.
Composite assessable price = Cost x (1 + Cost-to-profit ratio)
For goods subject to Consumption Tax, the composite assessable price should also include the Consumption Tax payable.
When selling goods or taxable services, taxpayers should issue special VAT invoices to the purchasers, and should indicate the sales value and output tax. The purchasers may credit the VAT indicated in the special VAT invoices when computing the VAT payable. However, when taxpayers sell goods or taxable services to final consumers, or tax-free items, or when small taxpayers sell goods or taxable services, the taxpayers should issue normal invoices, without listing the sales value or the VAT.
The VAT paid or borne by VAT taxpayers on their purchases of goods or taxable services will be the input tax for the taxpayers. The input taxes listed below can be credited against the output taxes.
- For taxpayers purchasing goods or taxable services (including the purchase of raw materials, fuel, power, etc.), the input tax is the VAT indicated on the special VAT invoices obtained from the sellers.
- For taxpayers importing goods, the input tax is the VAT indicated on the tax payment receipts obtained from the Customs office.
- For taxpayers purchasing tax-exempt agricultural products from agricultural workers and tax-exempt grains from State grain purchase/sale enterprises, the input tax may be computed based on the payment shown on the sale receipts or invoices, and a 13% credit rate.
Input tax = Purchase value x 13%
- For transportation expenses paid by taxpayers purchasing goods (excluding fixed assets) or selling goods, the creditable input tax is calculated based on the transportation expenses (excluding loading/unloading expenses, and insurance expenses related to transportation) listed in the transportation payment vouchers/invoices and on a 7% credit rate.
Input tax = Transportation payment x 7%
However, transportation expenses incurred when purchasing or selling tax-exempt goods cannot be included in computing the input tax creditable.
- Enterprises making use of waste and used materials may compute their input tax using the purchase price and a 10% rate.
Input tax = Purchase value x 10%
Claiming Input Tax Credits
When VAT payers have purchased goods or taxable services, they must go to the tax department to claim the input tax credit within 90 days of the issuance of the special VAT invoices by the anti-falsification tax control system. Otherwise, they will not be allowed to apply the input tax credits.
For special VAT invoices issued by the anti-falsification tax control system that have been successfully verified, taxpayers shall account for and claim the input tax credit within the month during which the verification was made. Otherwise, the credit will not be allowed.
For VAT payers who have purchased goods or taxable services, the time to claim their input tax credits with respect to invoices not issued by the anti-falsification tax control system is after the goods are put in stock in the case of industrial production enterprises, after payment in the case of commercial enterprises, or after payment of remuneration in the case of purchases of taxable services.
If a taxpayer meets the criteria to be classified as a normal VAT payer, but has not gone to the tax department to undergo identification procedures, or is unable to provide accurate tax information due to the taxpayer's imperfect accounting system, the relevant tax department will collect VAT on the taxpayer's output. It will not allow the taxpayer to claim input tax credit or use special VAT invoices.
Where taxpayers purchasing goods or taxable services have not obtained or kept the VAT credit documents in accordance with the regulations, or where the VAT paid and other relevant items are not indicated on the VAT credit documents in accordance with the regulations, the taxpayers will not be allowed to claim the input tax for credit against the output tax.
Items Disallowed for Input Tax Credits
For the following items, the input tax cannot be credited against the output tax.
- Fixed assets purchased (including machinery, transportation tools, and other such equipment, and tools related to production and business operations with a usage life of more than one year, and materials not related mainly to production or business operations with a usage life of more than 2 years and worth more than 2,000 yuan).
- Goods or taxable services purchased for use with non-taxable items (including the provision of non-taxable services, the transfer of intangible assets, and the sale of immovable assets and fixed assets in construction), except for enterprises in Liaoning Province, Jilin Province, and Heilongjiang Province, where the scope of input VAT credits has been expanded.
- Goods or taxable services purchased for use with tax-exempt items.
- Goods or taxable services purchased for collective welfare or private consumption.
- Abnormal losses of goods purchased (e.g., losses incurred due to natural disasters or bad management).
- Goods or taxable services purchased and consumed in products-in-progress or finished products that suffer abnormal losses.
If, however, taxpayers use purchased goods or taxable services whose input tax has already been credited, for non-taxable items, tax-exempt items, collective welfare, private consumption, or abnormal losses, the relevant input tax of the said purchases shall be deducted from the input tax for the current period.
In this scenario, we examine various stages in the production and handling of foodstuff.
Stage 1: Farm A sells wheat to flour factory B for 1 million yuan.
Under tax law, this portion of the farm's income is VAT-free.
Stage 2: B grinds the wheat into flour and sells it to cake factory C for 2 million yuan (exclusive of VAT, hereafter the price stated is exclusive of VAT). The applicable VAT rate is 13%.
The output tax is 260,000 yuan (i.e., 2 million yuan × 13%). Adding up the price and the tax gives 2.26 million yuan (i.e., 2 million yuan + 0.26 million yuan).
The input tax credit allowable is 130,000 yuan (i.e., 1 million yuan × 10%).
The VAT payable by B is 130,000 yuan (i.e., 260,000 yuan − 130,000 yuan).
Stage 3: C produces cakes with the flour purchased from B and sells them to store D for 8 million yuan. The applicable rate is 17%.
The output tax is 1.36 million yuan (i.e., 8 million yuan × 17%). Adding up the price and the tax gives 9.36 million yuan (i.e., 8 million yuan + 1.26 million yuan).
The input tax credit allowable is 260,000 yuan (that is B's output tax).
The VAT payable by C is 1.10 million yuan (i.e., 1.36 million yuan − 0.26 million yuan).
Stage 4: D sells to consumers the cakes purchased from C for 10 million yuan. The applicable VAT rate is 17%.
The output tax is 1.7 million yuan (i.e., 10 million yuan × 17%). Adding up the price and the tax gives 11.7 million yuan (i.e., 10 million yuan + 1.70 million yuan).
The input tax credit allowable is 1.36 million yuan (that is the output tax of C).
The VAT payable by D is 340,000 yuan (i.e., 1.7 million yuan − 1.36 million yuan).
Under the current pricing system in China, the retail price is tax-inclusive. In other words, it is the sum of the tax-exclusive price and the output tax. That means the price of the cakes for the final consumers is 11.7 million yuan (i.e., 10 million yuan + 1.7 million yuan).
The example discussed above has been summarized in Table 3.2.
|Table 3.2 Example of VAT computation|
|Enterprise||Commodity||Sales price (no tax) (in 10,000 yuan)||Applicable rate (%)||VAT (in 10,000 yuan)|
|Output tax*||Input tax||Tax payable**|
|* Output tax = (Sale price exclusive of VAT) × Applicable rate|
|** Tax payable = Output tax − Input tax|
Goods Returned and Discounts Offered
When computing the VAT payable by the taxpayers, the tax authorities may allow the excess portion of the input tax to be carried forward to the following period for credit if the output tax for the current period is insufficient to accommodate the input tax credit, or to be offset against the VAT owed, if any, by the taxpayers.
The VAT returned to the purchasers arising from the return of goods or the offer of discounts should be deducted from the output tax for the current period. The VAT recovered arising from the return of goods or discounts should be deducted from the input tax for the current period.
Normal Taxpayers Carrying Out Manufacturing Activities
Normal taxpayers manufacturing the following goods may use a simpler method to compute the VAT payable, employing a 6% levying rate (however, the method cannot be changed within 3 years once chosen), and may issue special VAT invoices:
- Electrical power produced by small hydropower units below the county level.
- Sand, earth, and stone used for construction, or for producing construction materials.
- Bricks, tiles, and lime continuously produced with the sand, earth, stone, and other minerals extracted by the taxpayer.
- Wall materials made of raw materials mixed with gangue, stone coal, powder coal, slag from coal boilers, or other waste slag.
- Bio-products made of micro-organisms, metabolites of micro-organisms, animal toxins, or the blood or tissues of human beings or animals.
- Supplied water (the taxpayer may credit the VAT listed in the special VAT invoices at the 6% levying rate obtained when purchasing the supplied water from a water supply factory with independent accounting).
- Commercial concrete produced and sold by normal taxpayers may also be taxed at a 6% VAT levying rate, but special VAT invoices cannot be issued.
These taxpayers fall into two main classifications.
- Production of taxable goods or the provision of taxable services: Those engaged principally in the production of goods or provision of taxable services (i.e., the sales value of this portion of their business exceeds 50% of the total sales value taxable annually), and concurrently in the wholesaling or retailing of goods whose annual taxable sales value is less than 1 million yuan.
- Wholesaling/retailing of goods: Those engaged in the wholesaling or retailing of goods whose annual taxable sales value is less than 1.8 million yuan (excluding gas stations that sell finished petroleum).
Individuals and non-enterprise units (those meeting the criteria for normal VAT payers and frequently involved in taxable activities may be identified as normal VAT payers) whose annual taxable sales value exceeds the standards for small-scale taxpayers, but that are not frequently involved in taxable activities, are still deemed to be small-scale taxpayers.
Small-scale taxpayers are taxed in a simplified manner. The VAT payable is computed based on the sales value of the goods and/or services, and the prescribed applicable VAT levying rate. The VAT is collected together with the payment for the sales from the purchasers and handed over to the tax department.
For small-scale taxpayers engaged in the wholesaling or retailing of goods, and those engaged principally in the wholesaling or retailing of goods, and concurrently engaged in the production of goods or provision of taxable services, the VAT levying rate is 4%. All other small-scale taxpayers are subject to a 6% levy.
In addition, a 4% VAT levying rate is applicable to commission shops on sales of goods on commission, to mortgage businesses on sales of dead mortgages, to sales of secondhand commodities, to approve duty-free shops on sales of tax-exempt goods, and to auction firms entrusted to auction taxable goods.
Tax payable = Sales value × Applicable levying rate
If the sales prices of the goods or services are tax-inclusive, the taxpayers must work out the tax-exclusive sales value by using the following formula:
Tax-exclusive sales value = Tax-inclusive sales value ÷ (1 + Applicable levying rate)
Any adjustment to the levy rates must be sanctioned by the State Council.
Any sales value rebated to purchasers by small-scale taxpayers arising from the return of goods or discounts shall be deducted from the sales value for the current period.
Mr Zhang's shop has earned a sales value of 11,000 yuan (including VAT) for the current month, with goods returned amounting to 600 yuan. The applicable VAT rate is 4%.
Tax-exclusive sales value = (11,000 yuan − 600 yuan) ÷ (1 + 4%) 10,000 yuan
Tax payable = 10,000 × 4% = 400 yuan
Upon approval by the relevant tax department, a small-scale taxpayer engaged in the wholesaling or retailing of goods, or one engaged principally in the wholesaling or retailing of goods, and concurrently engaged in the production of goods or provision of taxable services, can cease to be regarded as a small-scale taxpayer, and may compute and pay VAT as a normal VAT payer, if he meets the criteria listed below:
- His annual taxable sales value exceeds 300,000 yuan.
- He has a sound financial accounting system.
- He can accurately account for the output tax, input tax, and tax payable as required.
- He can provide precise tax information.
Once he is identified as a normal VAT payer, he will not be allowed to revert to being a small-scale taxpayer.
For imported goods, the VAT payable shall be computed and paid based on the composite assessable prices and the applicable tax rates prescribed. No input tax is allowable for credit.
Tax payable = Composite assessable price × Applicable VAT rate
Composite assessable price = Customs dutiable value + Customs Duty
For taxpayers importing taxable goods subject to Consumption Tax, Consumption Tax should be added to the composite assessable price.
A foreign trade company imports a batch of agricultural machines. The composite assessable price is 10 million yuan and the applicable rate for VAT is 13%.
VAT payable = 10 million yuan × 13% = 1.3 million yuan
- Agricultural production materials such as seeds, seedling plants, and farming plastic films, specified agricultural machines, chemicals, pesticides, feeds, and others, as well as self-produced primary agricultural products sold by agricultural producing units (including planting, breeding, forestry, animal husbandry, aquatic industry) and individuals.
- Exported goods under contract processing.
- The following equipment and relevant technology, accessories and parts, together with equipment imported for self-use by enterprises (projects):
- Those imported by foreign investment projects and domestic investment projects encouraged and supported by the State, whose importation is funded using just the project or enterprise's aggregate investment sum (i.e., its registered capital plus operational loans/financing).
- Those imported by enterprises for producing the items listed in the State High and New Technology Products Catalog.
- Those imported by software enterprises.
- Those imported by enterprises with foreign investment of the encouraged type and of the restricted type B, by research and development centers with foreign investment, and by enterprises with foreign investment that meet advanced technology or export orientation criteria for technical improvement whose importation is paid for using the enterprise's self-owned funds over and above the enterprise's aggregate investment sum, and whose importation falls within the approved scope of production and business operations.
- Those imported by research and development centers with foreign investment out of the aggregate investment sum.
- Those imported by projects that are in line with the catalog of advantageous industries and projects for introducing foreign capital in mid-west provinces, autonomous regions and municipalities directly under the State Council, and that are out of the total investment. (Certain tax incentives may also be enjoyed if the items are imported using the self-owned fund beyond the total investment).
- Integrated circuit equipment and apparatus imported by integrated circuit manufacturing enterprises as part of the importation of integrated circuit technology and whole sets of production equipment, and raw materials and consumables imported for self-use by integrated circuit manufacturing enterprises that are in line with State stipulations.
- Payments for software that are purchased abroad by enterprises to import advanced technology listed in the State High and New Technology Products Catalog.
- Equipment imported using loans from foreign governments and international financial organizations.
- Contraceptive medicines and devices.
- Antique books purchased from the public.
- Articles of scientific research and teaching that cannot be obtained at home, imported by science and research organizations and schools as specified by the State for direct use in scientific research and teaching, within reasonable limits.
- Imported equipment and facilities used directly for agricultural science research and experiments.
- Imported materials and equipment obtained free of charge from foreign governments and international organizations.
- Materials imported as part of donations by individuals, legal entities, and other organizations based overseas under rules governing poverty alleviation or charitable causes.
- Teaching equipment, books, materials, and articles for normal study donated by overseas donors for direct use in various types of vocational schools, high schools, secondary schools, primary schools, and/or kindergartens.
- Articles imported directly by organizations for the disabled, in particular, those for use by the disabled.
- Goods used and sold by individuals, and fixed assets of a goods nature that are used and sold by units and individual household managers (excluding motor vehicles, motorcycles, and yachts), whose selling price exceeds the original value (those exceeding the original value should be subject to half of the VAT levying rate of 4%).
- Grains sold by State grain purchase/sale enterprises that undertake the task of grain collection and storage, the military use of grains, grains slated for disaster relief, grains intended for persons relocating from reservoir project areas, and sales of the Government's edible vegetable oil reserves.
- Articles for military and police use that are produced by military industry enterprises, the enterprises of the armed forces, police department and justice department, and normal enterprises.
- Artificial limbs, wheelchairs, and orthopedic tools for special use by the disabled.
- Processing, repair and replacement services provided by handicapped individual business operators.
- Construction materials produced from waste residue in accordance with State rules.
- Blood specimens provided by blood stations to medical institutions.
- Preparations self-produced for self-use by non-profit medical institutions. Preparations self-produced for self-use by profitable medical institutions that use the profit obtained directly to improve medical and health conditions may be exempt from VAT for 3 years, starting from the date the firms obtain their business licenses.
- Film copies sold by film production factories set up with State Council approval.
- Waste and used materials re-collected by waste and used material collection enterprises.
- Exported goods self-produced by small taxpayers.
- Goods for everyday living that are imported by border residents through border trade. These may be exempt from import VAT up to a limit of 3,000 yuan per day per individual.
Certain VAT incentives (e.g., periodic tax reductions or exemptions, or refunds on taxes already paid) may also be available for the following items and entities:
- The newspapers and magazines of the Chinese Communist Party (CCP) and the democratic parties, the governments, the NPC, the People's Political Consultative Committee, the workers' unions, the Communist League, the Women's Association, Xinhua News Agency, the army, and governmental departments.
- Textbooks used in universities, high schools, and primary schools.
- Newspapers and magazines published exclusively for young readers.
- Books and magazines covering science and technology.
- Publications sold by Xinhua bookstores below the county level, and by supply stores in the countryside.
- Software products and integrated circuits developed or produced and sold by normal taxpayers.
- Gold and platinum.
- AIDS medications.
- Civil and welfare production enterprises.
- National trade enterprises.
Individual taxpayers whose sales volumes do not reach the threshold specified by the Ministry of Finance may be exempt from VAT. Under the current rules, the sales thresholds are as follows:
- Sales of goods: 2,000–5,000 yuan per month.
- Sales of taxable services: 1,500–3,000 yuan per month.
- Tax levied on each sale or per day: 150–200 yuan per sale or day.
The sales thresholds at different locations shall be determined by the offices of the SAT at the provincial level after taking local conditions into consideration, but within the ranges listed above.
For example, the Beijing Municipal Office of the SAT stipulates that, for sales of goods, the threshold is 5,000 yuan per month; and for sales of taxable services, it is 3,000 yuan per month. For the tax levied on each sale or per day, the threshold is 200 yuan per sale or day.
The Jiangxi Provincial Office of the SAT stipulates that, for sales of goods, the threshold is 3,000 yuan per month for cities, 2,800 yuan for counties and towns, and 2,000 yuan in the countryside; and for sales of taxable services, the threshold is 2,500 sales per month for cities, 2,200 yuan for counties and towns, and 1,500 yuan in the countryside. For the tax levied on each sale or per day, the threshold is 150 yuan per sale or day.
In addition, for individual household enterprises, and peasants selling aquatic products, animal husbandry products, vegetables, fruits, grain, and other agricultural products, and individual household enterprises, and peasants engaged mainly in selling the products listed above, the sales threshold is 5,000 yuan per month for all entities. For the tax levied on each sale or per day, the threshold is 200 yuan per sale or day.
Other VAT exemptions and reductions shall be determined by the State Council.
Where taxpayers deal in both VAT-exempt and VAT-reduction items, the taxpayers should account separately for the sales value of the exempt items and that of the reduction items. Otherwise, the tax department will not consider such tax exemptions or tax reductions.
Taxpayers exporting goods to which a 0% tax rate applies shall, upon completion of export procedures with the Customs office, apply to the relevant tax department on a monthly basis for VAT refunds on the goods exported by providing export declaration and other documents.
At present, 5 different rates apply:
- 17% for the exportation of vessels, motor vehicles, and key parts; space and aviation equipment; railway locomotives; machinery for lifting and engineering; programmable telephones; medical equipment and apparatus; and IT products as specified (such as integrated circuits, wireless telephones, and digital control machine tools).
- 13% for the exportation of machinery and equipment not subject to the 17% refund rate; electrical appliances and electronic products; transportation tools, apparatus, and meters; textile raw materials and the products thereof, that is, garments, shoes; clocks; ceramics; steel and steel products; cement; aluminum, lead and zinc; organic and inorganic chemical materials; coatings; pigments; rubber products; toys; sports articles; plastic products; traveling articles, luggage, and bags; rice, wheat, corn, cotton, wheat powder, and corn powder; and cut ducks and cut rabbits.
- 11% for the exportation of gasoline, and unforged zinc.
- 8% for the exportation of molybdenum ores and the refined ores thereof, yellow phosphorus, manganese iron, silicon iron, chrome iron, and unforged aluminum.
- 5% for the exportation of agricultural products (excluding those eligible for the 13% refund rate listed above), light and heavy sintered magnesia, and talcum.
The refund rate is either 5% or 6% for the exportation of the goods purchased from small-scale taxpayers (the latter is applicable to the goods of normal taxpayers with a refund rate exceeding 5%).
Unless otherwise regulated, the exportation of goods produced and exported by various production enterprises or exported by foreign trade enterprises under the authorization of the production enterprises (hereafter referred to as production enterprise exportation) shall be subject to a three-step tax method: exemption, credit, and refund.
- Exemption: The production enterprises are exempt from VAT on the exportation of goods at the stage of production and sales.
- Credit: The exempt or refundable input tax on the exportation of goods paid on the consumed raw materials and parts shall be used to credit the VAT payable by the production enterprises on their domestic sales of goods.
- Refund: The balance of the creditable input tax in excess of the VAT payable for the current month shall be refunded to the enterprises.
The amount of tax payable under the exemption-credit-refund method shall be computed based on the prescribed refund rates, the FOB prices of the exported goods, and the exchange rate.
The treatment of contracting for overseas repair services by production enterprises, and of contracting for machinery and electrical products by utilizing loans from international financial organizations or foreign governments by means of international bidding (the domestic enterprises may win the bid, or subcontract the projects from foreign enterprises that win the bid) shall be considered in reference to the rules described above.
Upon approval by the SAT office at the provincial level, the sale of steel by listed steel and iron enterprises to export-processing enterprises for producing exported products may be deemed as exportation for tax refund purposes.
Goods for which VAT can be refunded or for which VAT is exempt as specified by the State under special circumstances include the following categories:
- Goods transported out of China by companies engaged in overseas contracting for use in contracted projects abroad.
- Goods purchased at home and transported out of China by enterprises for investment abroad.
- Equipment, raw materials, and parts carried out of China for overseas processing and assembly.
- Goods exported by means of foreign-aid preferential loans, and foreign-aid joint and cooperative funds.
- Goods supplied by foreign vessel supply companies and oceangoing transportation supply companies to foreign vessels and Chinese oceangoing vessels for payment in foreign currency.
- Goods sold by duty-free shops at exit ports.
- Special goods purchased with ordinary invoices by exporting enterprises from small-scale taxpayers.
- Goods purchased by enterprises located in the bonded zones from the domestic market beyond the bonded zones for the purpose of exporting the goods, or exporting the goods after processing.
- Homemade equipment, raw materials and parts sold and transported by enterprises out of export-processing zones to enterprises within the zones for use by enterprises within the zones.
- Water, electricity, and gas consumed by production enterprises within the export-processing zones while producing export goods.
- Homemade equipment (including materials and parts purchased together with the equipment) procured by enterprises with foreign investment using just the enterprise's aggregate investment sum (i.e., its registered capital plus operational loans/financing), and within the scope specified by the State for tax exemption.
- Homemade goods purchased and exported by Sino-foreign joint ventures of a commercial nature that are established with State Council approval, and that have import/export franchises.
- Overseas repairing business undertaken by foreign trade enterprises.
- Goods and services purchased in China by foreign embassies, consuls to China, diplomatic representatives, and consular staff.
In the case of goods returned or Customs rejections made after VAT refunds have been given, the taxpayers should pay back the VAT refunded in accordance with the rules.
Sales of Goods or Taxable Services
For sale of goods or taxable services, VAT liability arises on the date the sales payment is received, or the documented evidence of the right to collect the sales sum is obtained. Below, the main scenarios are outlined.
- Sales of goods under the direct payment method: The date on which the sales sum is received, or the documented evidence of the right to collect the sales sum is obtained, and the bills of lading are delivered to purchasers, regardless whether the goods are actually delivered.
- For sales of goods where the sales value is entrusted for collection, including cases where collection is entrusted to banks: The date on which the goods are delivered, and the procedures for entrusted collection are completed.
- For sales of goods purchased on credit or by instalment: The date of collection agreed upon according to the contracts entered into by the parties involved.
- For sales of goods with payments made in advance: The date on which the goods are delivered.
- For sales of goods on consignment to other taxpayers: The date on which the detailed list of the consignment sales is received from the consignee.
- For sales of taxable services: The date on which the services are provided, and the payment is received or the documented evidence of the right to collect the payment is obtained.
Importation of Goods
Here, VAT liability arises on the date of the import declaration.
Time Limits on Tax Payments
Depending on the amount of VAT payable, the assessable period may be 1 day, 3 days, 5 days, 10 days, 15 days, or 1 month.
Where taxpayers are unable to assess and pay VAT within the specified time period, the VAT may be assessed and paid on a transaction-by-transaction basis.
Taxpayers whose assessable period is 1 month should report and pay tax within 10 days of the end of the period. Taxpayers whose assessable period is 1 day, 3 days, 5 days, 10 days, or 15 days should prepay the tax within 5 days of the end of the period, and report and settle the tax payment within 10 days of the first day of the following month.
Taxpayers importing goods should pay VAT within 7 days of the issuance of the tax payment certificates by the Customs office.
Places for Tax Payment
Businesses with Fixed Establishments
Businesses with a fixed establishment should report and pay VAT to the local tax office in charge of the locale where the establishment is situated. If the head office and branches are not situated in the same county (or city), the businesses should report and pay VAT separately to the respective local tax offices. The head office may, upon obtaining approval from the SAT or its authorized tax department, report and pay VAT on a consolidated basis to the local tax office in charge of the locale where the head office is located.
Businesses with Fixed Establishments Selling Goods Elsewhere
Businesses with a fixed establishment selling goods in another county (or city) should apply for the issuance of the tax administration certificate for outbound business activities from the local tax office in charge of the locale where the establishment is situated. Then they should report and pay VAT to the local tax office in charge of the locale where the establishment is situated. When it is necessary to issue VAT special invoices to the purchasers, the taxpayers should return to the locale where the establishment is situated.
Businesses selling goods and taxable services in another county (or city) without the tax administration certificates issued by the local tax office in charge of the locale where the establishment is situated, should report and pay VAT to the local tax office in charge of the locale where the sales activities take place. The VAT shall be computed based on a 4% levying rate. If the taxpayers fail to report the sales activities and to pay VAT accordingly to the relevant local tax office, the tax office concerned shall collect the VAT due.
Businesses without Fixed Establishments
Businesses without a fixed base selling goods or taxable services shall report and pay VAT to the local tax office in charge of the locale where the sales activities take place. If they sell goods or taxable services in another county (or city), and fail to report and pay VAT to the local tax office in charge of the locale where the sales activities take place, the local tax office in charge of the locale where the businesses are situated or residing shall collect the tax.
Direct-Managed Chain Enterprises Crossing Various Regions
For direct-managed chain enterprises that cross different regions (i.e., chain stores wholly controlled or held by the head office), the head office may be allowed to report and pay the VAT on a consolidated basis to the local tax office if the chain stores are connected via a computer network, if they engage in the uniform purchase and supply of commodities, if they engage in uniform accounting and uniform management and operation in accordance with the rules, and if they meet the following criteria:
- Enterprises within one province/autonomous region/municipality directly under the State Council/separately listed city: They should report to the SAT office of the province/autonomous region/municipality directly under the State Council/separately listed city, and the financial department at the same level, for approval.
- Enterprises within one county/city: They should report to the SAT office of the county/city, and the financial department at the same level, for approval.
Importation of Goods
For the importation of goods, the importer or his agent shall report and pay VAT to the Customs offices situated in the locale where the imports are declared.
"Value-Added Tax." Taxation in China. . Encyclopedia.com. (June 17, 2019). https://www.encyclopedia.com/books/international-magazines/value-added-tax
"Value-Added Tax." Taxation in China. . Retrieved June 17, 2019 from Encyclopedia.com: https://www.encyclopedia.com/books/international-magazines/value-added-tax