China’s Value-Added Tax Law - Important Changes of the Latest Draft

published on 1 February 2020 | reading time approx. 2 minutes

by Christina Gigler and Kathy Chen

In the broad context of the National Tax System Reform, the future development and changes of the Value-Added Tax (VAT) legislation in the People’s Republic of China are worthy of attention. The draft seeking public comments on the VAT Law of the People’s Republic of China (“the Draft”) sticks to the direction of the National Tax System Reform, and is also in line with the development trend of concise tax rates, making itself more friendly to taxpayers. Nevertheless, it remains to be seen what concrete changes will be confirmed in the final version of the VAT Law.

Taxable Transactions

The Draft further integrates the scope of VAT taxable transactions. The original segregation of processing, repairing and replacement services has been abolished and such services have been incorporated under the “service” item. Whereas sales of financial products are singled out. The scope of taxable transactions is more clearly classified based on the respective characteristics of each taxable transaction. Also, the Draft has clearly defined non-taxable transactions, and further clarified the scope of non-taxable transactions.

Threshold of VAT

In the Draft, the threshold of VAT depends on the sales of taxpayers, which is set uniformly at the amount of RMB 300,000 for quarterly sales. Those who have not reached the threshold are not VAT taxpayers. Whereas units and individuals who have not reached the threshold can still choose to pay VAT voluntarily.

Tax Retained at the Period-End

The system of tax retained at the end of the period has been formally written in the Draft. In 2019, the Ministry of Finance and the State Taxation Administration jointly issued an announcement on the tax retained policy, which stipulates that taxpayers of advanced manufacturing industries that meet certain conditions can apply with the tax authorities for refunding incremental tax credits.

For enterprises, if it is confirmed by law in the future, this system will help to alleviate their capital pressure and help to expand their scales of business. However, whether this system can be confirmed in the VAT law in the future and how to implement still depends on specific implementation measures to be issued by related financial and tax authorities.

Countering Tax Avoidance

According to Article 18 of the Draft, where the sales of VAT taxpayers are unreasonable, significantly lower or higher, and without reasonable commercial purposes, the tax authorities are authorized to verify the sales by reasonable means. Consequently the tax authorities’ intervention can not only be triggered if turnover is lower than normal, but also in the absence of a normal business purpose or if turnover is significantly higher than normal.

Taxation Method

According to Article 25 of the Draft, where taxpayers are entitled to choose the simplified taxation method in accordance with the State Council’s regulations, the taxation method shall not be changed within 36 months once being chosen. Therefore, it is advised that upon the time of its establishment, a new enterprise should opt for an appropriate taxation method based on a reasonable predication of the scales of market and sales.

Future Development

Generally speaking, compared with the preceding interim regulations concerning VAT, the Draft is moving towards concreteness and unification, and is becoming more friendly to taxpayers. However, the Draft still needs to be improved in a number of aspects, such as the interpretation of certain expressions and the improvement of related supporting systems. It remains to be seen what specific changes the final and officially released VAT law will bring in the future.