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On September 2023, a new version of the Value Added Tax Law of the People’s Republic of China (the “draft VAT Law”) has been published for deliberation. If passed, the VAT Law will consolidate China’s current VAT regulations into one overarching piece of legislation.
The draft VAT law maintains the majority of China’s existing VAT regulations, with a few changes made to clarify definitions (1), adjust the scope of taxable and non-taxable items (2), and the addition of a new VAT refund mechanism (3), among others.
1) Clarification of “small-scale taxpayers”
Article 8 of the draft VAT Law defines the notion of “small-scale taxpayers” as “taxpayers whose annual VAT sales do not exceed RMB 5 million (approx. EUR 660,000)”. This is in line with the definition of small-scale taxpayers in other regulations, but its inclusion in the VAT law will provide additional protection for smaller businesses in affairs related to VAT payments.
The definition of a small-scale taxpayer is important because these taxpayers are eligible for a lower VAT rate and “simplified tax calculation method” under the VAT law.
2) Non-taxable transactions adjustments
The draft VAT law explicitly stipulates that the following activities do not constitute “taxable transactions”, and are therefore not subject to VAT:
· The provision of services by an employee in order to obtain wages and salaries from an employer;
· The collection of administrative fees and government funds;
· The collection of compensation for being expropriated or requisitioned in accordance with the law; and
· Obtaining income from deposit interest.
3) New end-of-period tax refund mechanism
The draft VAT law adds a new VAT refund mechanism. However, this system has not been fully formulated yet. Article 20 of the draft VAT law stipulates that “If the input tax is greater than the output tax in the current period, the taxpayer can choose to carry it forward to the next period for deduction or apply for a refund.” It also states that “the specific measures shall be stipulated by the financial and taxation departments of the State Council”.
It is important for businesses in China to take the time to assess the potential impact of the draft VAT law before it comes into effect, in order to properly prepare for any potential changes. This should include both any potential drawbacks and benefits to the company and an assessment of any necessary changes that the company can make to address a higher tax liability or to take advantage of the benefits.
Our experienced team can help you to assess these changes and conduct changes, if necessary, in your operations, so please do not hesitate to contact us at contact@orbis-alliance.com for professional tax