Legal Rules on VAT

Legal Rules on VAT
VAT is a tax levied on the value-added amount of the production and circulation of goods and labor services at various stages. Value-added amount refers to the value newly added by taxpayers in the process of selling goods, providing processing, repair and maintenance services, and importing goods within the territory of China, that is, the difference between the income obtained by taxpayers in selling products or providing services and the amount paid for such goods or services within a period of time. The newly revised Provisional Regulations of the People's Republic of China on VAT were passed at the 34th Executive Meeting of the State Council on November 5, 2008, and came into effect on January 1, 2009.
(I) Taxpayers of VAT
Entities and individuals that sell goods or provide processing, repair and maintenance services, and import goods within the territory of the People's Republic of China are taxpayers of VAT.
(II) Incidence of taxation
Sales of goods, provision of processing, repair and maintenance services, and import of goods within the territory of China fall within the incidence of VAT. Goods are the basic taxation objects of VAT, specifically referring to power, heat, gas, and other tangible movable property other than real estate and other buildings, and excluding intangible assets and real estate. Processing refers to the business in which the principal provides raw materials and main materials, and the trustee manufactures goods as entrusted by the principal requirements and charges processing fees. Repair and maintenance refers to the business of repairing damaged or malfunctioning items to restore them to their original state and functions as entrusted.
(III) VAT rate
VAT adopts proportional rates of three levels: basic rate, low rate, and zero rate. The basic rate is 17% and is applicable to most VAT taxpayers. The low rate is 13% and is applicable to taxpayers who sell or import necessities for people's spiritual and material life, such as grain, edible vegetable oil, tap water, heating, cooling, hot water, gas, liquefied petroleum gas, natural gas, biogas, and coal products for residents; Books, newspapers, and magazines; Feed, chemical fertilizers, pesticides, agricultural machinery, agricultural film, etc. Zero rate is only applicable to the goods exported by taxpayers, unless otherwise stipulated by the State Council.
(IV) Calculation of VAT
(1) For general taxpayers who sell goods or provide taxable services, their tax payable shall be calculated in the "tax deduction method". The formula is as follows: Tax payable = current output tax - current input tax. Wherein, current output tax = current sales amount * tax rate; Current input tax refers to the VAT amount paid by the taxpayer for such goods or services.
(2) If a small taxpayer sells goods or provides taxable services, their tax payable shall be calculated in a simple method as follows: Tax payable = sales amount * tax rate. The tax rate is usually 3%. The standards for small taxpayers shall be stipulated by the Ministry of Finance and the State Taxation Administration of the State Council.
(3) Tax payable for all imported goods shall be calculated based on the composition of the component price taxable (component price) as follows: Tax payable = component price * tax rate. Component price = price after tariff + tariff + consumption tax.
(V) VAT relief
(1) VAT adopts the method of prescribed threshold for taxpayers to reduce their tax burden.
① The threshold for sales of goods is the monthly sales revenue of RMB 600 to 2,000;
② The threshold for sales of taxable services is the monthly sales revenue of RMB 200 to 800;
③ The threshold on a transaction basis is RMB 50 to 80 per transaction/day.
The above rules pertaining to threshold are only applicable to individuals, and taxpayers whose sales revenue has not reached the threshold for taxation are exempt from VAT.
(2) Items exempt from VAT:
① Agricultural products produced and sold by farmers themselves;
② Contraceptive drugs and devices;
③ Antique books;
④ Imported instruments and equipment directly used for scientific research, experimentation, and teaching;
⑤ Imported materials and equipment provided as assistance free of charge by foreign governments and international organizations;
⑥ Articles directly imported by organizations of the disabled for the exclusive use by the disabled; and
⑦ Used goods sold by owners.
The tax exemption and reduction items of VAT shall be stipulated by the State Council, and no regional or industrial department shall stipulate exemption or reduction items. Where zero tax rate is applied, taxpayers may be exempted from paying taxes in this stage, and their taxes paid in the previous stage may also be deducted.
(VI) Payment of taxes
1. Time of occurrence of tax obligation
(1) The tax obligation of VAT occurs on the day when payment or payment receipt is received in case of sales of goods or provision of taxable services; and
(2) The tax obligation of VAT occurs on the day of customs declaration in case of imported goods.
2. Tax payment places
(1) A business with a permanent premise shall declare and pay taxes to the competent tax authority in the place where its premise is located. If the head office and its branch offices are not located in the same county (city), they shall respectively declare and pay taxes to the competent tax authorities in the places where they are located. With the approval of the State Administration of Taxation or its authorized tax authorities, the head office may summarize, declare, and pay taxes to the competent tax authority in the place where the head office is located.
(2) A business with a permanent premise that sells goods in a different county (or city) shall apply to the competent tax authority in the place where its premise is located for the issuance of a tax administration certificate for outbound business activities, and declare and pay taxes to the competent tax authority in the place where the premise is located. Where a business sells goods or provides taxable services in a different county (or city) without a tax administration certificate for outbound business activities issued by the competent tax authority in the place where its premise is located, it shall declare and pay taxes to the competent tax authority in the place where the business activities occur, In case of failure to declare and pay taxes to competent tax authority in the place where the business activities occur, the taxes shall be levied by the competent tax authority in the place where its premise is located.
(3) A business without a permanent premise that sells goods or provides taxable services shall declare and pay taxes to the competent tax authority in the place where the sales activities occur or labor services are provided; and
(4) For imported goods, the importer or their agent shall declare and pay taxes to the customs at the place of customs declaration.
3. Tax payment period
The tax payment period of VAT shall be 1 day, 3 days, 5 days, 10 days, 15 days, 1 month, or 1 quarter. A taxpayer shall pay taxes over the tax payment periods determined by the competent tax authority based on the amounts of taxes payable, or pay taxes on a transaction basis if their taxes cannot be assessed in regular periods. A taxpayer shall declare and pay taxes within 10 days from the expiration date if their taxes are payable on a monthly or quarterly basis, or prepay taxes within 5 days from the expiration date and declare and pay them within 10 days from the first day of the following month if their taxes are payable within a period of 1 day or 3, 5, 10, or 15 days. A taxpayer importing goods shall pay taxes within 7 days from the date of the tax payment certificate issued by the customs.
(VII) Taxation administration
In accordance with the applicable provisions of The Law of the People's Republic of China on the Administration of Tax Collection and its Interpretations, VAT shall be collected by the tax authorities, and the VAT of imported goods shall be collected by the customs on behalf of the tax authorities.