China: The Chinese government promulgated a series of policies on deepening the reform of value-added tax

On March 20, 2019, the Ministry of Finance, the State Taxation Administration and the General Administration of Customs jointly promulgated a policy on deepening the reform of value-added tax (hereinafter referred to as VAT), which took effect on April 1, 2019: 

1. If the general taxpayer of VAT (hereinafter referred to as the taxpayer) commits VAT taxable sale or imports goods, the tax rate shall be reduced to 13% or 9%, if the original applicable tax rate is 16% or 10%, respectively. 

2. If the taxpayer buys agricultural products, the deduction rate shall be reduced to 9% from the original one of 10%. Taxpayers who purchase agricultural products for the production or entrusted processing of goods with a 13% tax rate, shall calculate the input tax amount at a deduction rate of 10%. 

3. For goods and services exported at a tax rate of 16% and an export tax rebate rate of 16%, the export tax rebate rate shall be reduced to 13%. For goods and cross-border taxable trades exported at a tax rate of 10% and an export tax rebate rate of 10%, the export tax rebate rate shall be reduced to 9% (please refer to the Announcement for detailed information on the implementation date).

4. For travelers departing from China who claim a refund on goods with a tax rate of 13%, the tax rebate rate shall be 11%; while for those who claim a refund on goods with a tax rate of 9%, the tax rebate rate shall be 8%.  

Before June 30, 2019, if the VAT is levied at the preadjustment tax rate, the refund rate before the adjustment shall be applied; if the VAT is levied at the adjusted rate, the adjusted refund rate shall be implemented. 

The execution time of the tax refund rate shall be subject to the date of issuance of the ordinary VAT invoice for returned goods. 

5. With effect from April 1, 2019, the Article 1 (4.1), and Article 2 (1.1) of the Provisions on Matters Related to the Pilot Project for Conversion of Business Tax to Value-added Tax (C.SH. [2016] No.36), shall cease to be implemented, which means that the input tax amount arising from the taxpayer’s acquisition of real estate or real estate in construction shall no longer be deducted in two years. The input tax amount to be deducted which has not been completely deducted in accordance with the above provisions, may be deducted from the output tax since April 2019. 

6. When a taxpayer purchases domestic passenger transport service, the input tax can be deducted from the output tax (see the Announcement for detailed calculation method). 

Article 27 (6) of the Implementation Measures for the Pilot Project of the Conversion of Business Tax to Value-added Tax (C.SH. [2016] No.36), and Article 2 (1.5) of the Provisions on Matters Related to the Pilot Project for Conversion of Business Tax to Valueadded Tax (C.SH. [2016] No.36), shall be adjusted from “purchased passenger transport services, loan services, catering services, resident daily services and entertainment services” to “purchased loan services, catering services, resident daily services and entertainment services”. 

7. From April 1, 2019 to December 31, 2021, taxpayers engaging in production and consumer service industry are allowed to add 10% to the amount of tax payable in accordance with the deductible input tax for the current period (hereinafter referred to as the additional deduction policy). 

(i) “Taxpayers engaging in production and life services” as mentioned herein refer to those whose sales amount from providing postal services, telecommunications services, modern services and life services (hereinafter referred to as the Four Services) exceeds 50% of their total sales. The Four Services shall be subject to the scope stipulated in the Notes to Sales Services, Intangible Assets and Real Estate (C.SH. [2016] No.36). 

For taxpayers registered before March 31, 2019, if their sales volume for the period from April 2018 to March 2019 (for those who operate less than 12 months, the sales volume shall be calculated based on the actual operating period) meets the above-mentioned conditions, the additional deduction policy shall be effective since April 1, 2019. 

For taxpayers registered after April 1, 2019, if their sales volume for the three-month period from the date of registration meets the above requirements, the additional deduction policy shall be applied from the date of registration as a general taxpayer. 

Once the additional deduction policy is applied, it shall not be adjusted in the current year, and whether it will be applicable in the following years shall be determined on the basis of the sales volume of the previous year. 

The additional deduction amount that shall be accrued but not accrued by taxpayers, shall be accrued in the current period in which the applicable additional deduction policy is determined. 

(ii) The taxpayer shall calculate the amount of add-on deduction on the basis of 10% of the current input tax credit. The input tax amount is not allowed to be deducting from the output tax in accordance with the current regulations, shall not be taken account into the additional deduction amount. If the input tax with an additional deductible amount being accrued is transferred out according to regulations, the additional deduction amount shall be reduced accordingly for the current period in which the input tax is transferred out. 

(iii) The taxpayer shall, after calculating the tax payable under the general tax method (hereinafter referred to as the tax payable before deduction) in line with the current provisions, apply the following additional deduction policies accordingly: 

A. If the tax payable before the deduction is zero, the current deductible additional deduction amount shall be fully carried forward to the next period for deduction; 

B. If the tax payable before the deduction is larger than zero and greater than the current deductible additional deduction amount, the deductible additional deduction amount for the current period shall be fully deducted from the tax payable before deduction; 

C. If the tax payable before the deduction is larger than zero and islessthan or equal to the current deductible additional deduction amount, the current deductible additional deduction amount shall be set off against tax payable to zero. The current add-on deduction amount that has not been completely set off shall be carried forward to the following period. 

(iv) The additional deduction policy is not applicable for taxpayers who export goods and services or commit cross-border taxable trades, thus the corresponding input tax shall not be deducted. 

For taxpayers engaging in the export of goods and services or cross-border taxable trades, and their input tax cannot be divided and are not allowed to accrue additional deduction amount, the following formula shall apply: 

Input tax not allowed to accrue additional deduction amount = total input tax that cannot be divided in the current period * sales of both exports of goods and services and cross-border taxable trades in the current period / total sales in the current period. 

(v) Taxpayers shall independently account for the changes in the calculation, set-off, adjustment and balance of the additional deduction amounts. Whoever defrauds the applicable additional deduction policy or falsely increases the additional deductible amount shall be punished in accordance with the Law of the People’s Republic of China on the Administration of Tax Collection. 

(vi) After the expiration of the additional deduction policy, taxpayers shall no longer calculate the additional deduction amount, and the balance of the additional deduction amount shall cease to be set off. 

8. The tax rebate system for the retention of VAT at the end of period shall be piloted from April 1, 2019.

‍