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China’s value-added tax (VAT) reform is the largest tax overhaul in the country since 1994. The reform began as a Shanghai-based pilot program – a popular method for incubating reforms in the country – in 2012 before expanding to other cities and nationwide to all sectors in 2016.
Under the VAT, taxpayers fall into one of two categories based on their annual taxable sales amount: general taxpayers or small-scale taxpayers.
Taxpayers with annual taxable sales exceeding the annual sales ceiling set for small-scale taxpayers must apply for general taxpayer status. A company must obtain VAT general taxpayer status in order to issue fapiao, which is a key requirement for conducting business. The sales ceilings are:
RMB 500,000 (US $75,400) for industrial taxpayers (i.e., enterprises primarily engaged in the manufacture of goods or provision of taxable services);
RMB 800,000 (US $120,570) for commercial taxpayers (i.e., enterprises engaged in the wholesale or retail of goods) ; and,
RMB 5 million (US$754,000) for VAT reform taxpayers.
Small-scale taxpayers are subject to a lower three percent uniform VAT rate; general taxpayers are subject to rates ranging from six to 17 percent. However, small-scale taxpayers cannot credit input VAT from output VAT, nor are they entitled to VAT export exemptions and refunds.
Taxpayers who have annual taxable sales below the ceiling, as well as taxpayers who have recently established a new business, can voluntarily apply for general taxpayer recognition, provided they are capable of setting up legitimate, valid, and accurate bookkeeping.
In short, the reform replaced the Business Tax (BT) – which previously coexisted alongside VAT, and applied to a select number of industries – with the VAT. After VAT reform, authorities treated the sale of goods and services alike, eliminating the disproportionate taxation of services and simplifying China’s tax system
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