7.2 Value-Added Tax
As a type of turnover tax, value-added tax (VAT) is levied on the increased value of commodities at different stages of production or circulation, or on the value-added of commodities. All enterprises and individuals engaged in the sale or import of goods or the provision of processing, repair or maintenance services in China have to pay VAT.
In China, VAT payers are divided into general taxpayers and small-scale taxpayers on the basis of their operation scale and accounting systems, with different methods of tax computation.
Small-scale taxpayers are taxpayers without sound accounting systems whose annual taxable value of sales is below the prescribed standards, namely Rmb500,000 for taxpayers engaged in the production of goods or the provision of taxable services; and less than Rmb800,000 for those engaged in wholesaling or retailing business.
General taxpayers mainly refer to enterprises whose annual taxable sales value exceeds that of small-scale taxpayers. Small production enterprises with a sound accounting and auditing system may be classified as general taxpayers. However, individuals, non-enterprise units, and enterprises that do not regularly engage in taxable operations are classified as small-scale taxpayers even if their annual taxable sales value exceeds the standards for small-scale taxpayers.
Method of Computation
VAT payable by small-scale taxpayers is calculated by a simple method on the basis of the sales value and the tax rate without offset or deduction for input VAT. The applicable rate is 3%. The formula for the computation of VAT is as follows:
Tax payable = sales value x tax rate (3%)
The actual amount of VAT payable by general taxpayers is the excess amount of output VAT over input VAT. The formula for the computation of the tax payable is as follows:
Tax payable = current output VAT - current input VAT
Output VAT = sales value x applicable tax rate
If the current output VAT is smaller than the current input VAT, the amount that cannot be fully set off or deducted may be carried over to the following tax period.
VAT on goods imported by taxpayers is computed on the basis of the composite assessable value and the applicable tax rate without offset or deduction for input VAT. The formula for the computation of the tax payable is as follows:
Tax payable = composite assessable value x applicable tax rate
Composite assessable value = customs dutiable value + customs duty
For taxpayers importing taxable consumer goods, the consumption tax payable will be added to the composite assessable value.
There are two VAT rates in China, a basic rate of 17% and a lower rate of 13%. The sale and import of the following commodities are subject to VAT at the lower rate of 13%: grains, edible vegetable oil, drinking water, heating, air-conditioning, hot water, coal gas, liquefied petroleum gas, natural gas, methane, coal products for domestic use; books, newspapers and magazines; feedstuffs, chemical fertilisers, pesticides, agricultural machinery, agricultural plastic sheeting; and other goods as specified by the State Council.
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