This post is part of Horizons ongoing sharing of important information related to the implementation of China VAT reforms.
China business enterprises within 17% and 11% value-added tax rates subject to a 1% reduction
On the 4 April 2018, the Ministry of Finance and State Administration of Taxation jointly announced (Cai Shui [2018] No. 32) that the VAT rate applicable to manufacturing and trading industry shall be decreased from the current 17% to 16% for transportation, construction and basic telecommunications services; and 11% to 10% for the agricultural products sector. Both reductions are in effect from 1 May 2018.
As background, in May 2016, VAT reforms were implemented nationwide replacing the previous business tax. VAT was extended to the sale and importation of all goods and provision of services in or to China, including construction, real estate, finance and consumer services. The unification of a single VAT system enabled businesses which were already VAT taxpayers to generally be able to claim input VAT credits for the services they consume from those sectors that are VAT taxpayers; and businesses, as general VAT taxpayers, became eligible to claim input VAT credits for the goods and services they purchase or consume.
During the first six months of the reforms, it was reported the scheme helped enterprises in the four sectors save a total of 96.5 billion RMB, with 98.5 percent of business owners seeing their tax burden reduced or at least levelled off.
Cai Shui [2018] No. 32 primarily affects taxable activities within the manufacturing and trading industry, construction and real estate, and sale and import of general goods.
| Taxable activities | VAT rate before | VAT rate after |
| Sale and import of general goods; provision of processing, repair and replacement services; and provision of leasing services of tangible and moveable assets | 17% | 16% |
| Sale and import of “specified goods”;* provision of transportation services, postal services, basic telecom services, construction services and leasing services of immovable property; and sale of land use rights or immovable property | 11% | 10% |
* Specified goods include agricultural products (including grains), tap water, heat, liquefied petroleum gas, natural gas, edible vegetable oil, air conditioning, hot water, coal gas, coal products for residential use, edible salt, agricultural machinery, feed, pesticide, agricultural film, fertilizer, methane, dimethyl ether, books, newspapers, magazines, audio and visual products, and electronic publications.
Reduction of export VAT refund rate
The export VAT refund rate for goods that are currently subject to both the 17%/11% VAT rates and export VAT refunds rate also will be reduced to 16%/10%, respectively. Transitional rules will apply to exports of affected supplies until 31 July 2018, with the export date being the date shown on the export customs declaration form for exports of goods and the export invoice date for exports of services:
- Trading enterprises: The 17%/11% export VAT refund rate will apply if the goods were subject to 17%/11% VAT when they were purchased by a trading enterprise. The 16%/10% export VAT refund rate will apply if the goods were subject to the 16%/10% VAT when they were purchased by a trading enterprise.
- Manufacturing enterprises: The 17%/11% export VAT refund rate will apply.
How to proceed
The reduced VAT rates stand to impact applicable businesses in several ways and, if appropriate, businesses may consider the following preparations:
- Affected taxpayers should adjust the pricing mechanism for products and services accordingly from 1 May. Taxpayers should assess the impact of its tax implications, including impacts to profits, input VAT credits and cash-flow management.
- Related employees and internal systems should be timely updated to ensure the tax rate change is correctly reflected in relevant documents (e.g. sales or purchase orders, invoices) and for financial accounting purposes, including VAT filing and bookkeeping.
- In projects continuing after 1 May, such as real estate property and construction, it is advisable to adjust the related clauses in contracts with vendors and customers.
- Exporters should consider the transitional period, as exports on or after the 31 July 2018 are subject to lower VAT return rate, whilst exports before the 31 July which were levied at the previous 17% or 11% are subject to the previous VAT return rate 17% or 11%.
- Attention to when the tax liability occurs within each sector should be considered. Since, tax liability may arise upon the advance payment of goods or services, rather than the delivery of goods or services in certain sectors, taxpayers should consider the date of tax liability and apply the VAT rates correctly.
The reduced tax rates proceed from the First Session of the 13th National People’s Congress held in March 2018. Tax cuts were announced as the main focus in the First Session and accordingly to the official forecast report for 2018, tax cuts are estimated at 240 billion RMB.
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