Important Things to Know About VAT in China
China has a compelling economy, and there is a new tax reform that was just implemented. Back in May 2016, the Business Tax (BT) was replaced by the Value-Added Tax (VAT). The goal of this reform is to make the tax burden easier on companies and help the Chinese economy to shift from labour-oriented to service-oriented.
Knowing about the VAT is essential if you want to set up a business in China, so read on.
VAT Rates in China
The majority of countries are charging VAT on the products and services they sell, import, and more. China is a progressive country, and it only makes sense that they will do the same.
However, it tends to be complicated.
- General VAT on the imported, installed, repaired, and items on sale are 17%
- Paper, food, and heating products have a 13% tax.
- Chosen industries like R&D and technology, IT, cultural creativity, broadcasting, logistics auxiliary, TV, and the film only have a 6% VAT.
- Small-scale taxpayers are only paying 3% tax.
- Transportation services that came from a Chinese company and provided to foreign companies get 0% tax.
Tax System of China
China already had a tax system since 1979, the time when they entered the arena of global trade. However, the only ones to operate under the VAT system were manufacturers and industrial businesses. Those that provided services were paying Chinese business tax. In consequence of this, the service providers needed to pay more taxes based on revenue, and they did not have tax deductions. By May 1 2016, Chinese service sectors like finances, construction, real estate, lifestyle, postal, telecommunications, and transportation were already made part of the VAT system. They were no longer required to pay for business taxes.
Fapiao is a word about a legal slip which is used for validation when someone purchases either goods or services. It is used by taxpayers and businesses to comply with the legal standards that are required by the tax system of China. It is also essential for keeping track of any business transaction in the enterprises. A company is only allowed to issue one if the transaction happened within their operational boundaries.
VAT Reform Timeline & Changes
Back in 2018, the rate of VAT for General VAT taxpayers was reduced to 16% from 17%, and then from 11% to 10%. Then, in 2019, the VAT rate for manufacturers decreased from 16% to 13%. Then, the 10% country VAT rate that was applied to construction and transportation activities was reduced to 9% from 10%.
The newest announcement about the VAT in China includes specific changes, and it gives more clarification regarding the tax reform that was made effective on April 1, 2019. Here is the updated one:
- VAT rates were reduced in 2019
- Adjustment of VAT refund rates
- VAT super credit was introduced
- VAT refunds pilot scheme needed to claim excess input of VAT credit
- Expanding creditable input scope for real estate VAT
- The clarification announcement on the VAT reform of China
It is essential to have a trusted accountant in your company to keep track of your taxes and will do the bookkeeping so you can benefit from tax deductions. Setting up a business in China does not have to be hard, especially with our help. Our experts will guide you in every step so your business can open smoothly.