Regulation update on VAT exemption policy for small-scale taxpayers

CHINA - Regulation update on VAT exemption policy for small-scale taxpayers

March 2019 

To reduce the tax burden on so-called small-scale taxpayers, and to help such taxpayers grow their businesses, the Chinese tax authority released Announcement of the State Administration of Taxation [2019] No.4 on 19 January 2019. The changes announced in this circular came into force 1 January 2019.

The circular applies to small-scale taxpayers with monthly sales of CNY 100,000 or less. The circular set out the following rules:

  • Small-scale taxpayers that carry out sales that would normally be subject to VAT are exempt from VAT if their total monthly sales (after deducting the sales from selling real estate) are CNY 100,000 or less.
  • For a small-scale taxpayer that is subject to VAT on revenue, less costs, the sales after deduction shall be used to determine whether it is entitled to the VAT exemption policy stipulated in the announcement.
  • If any individual leases out their immovable property and collects rent on a lump sum basis, the rental income may be apportioned evenly over the lease period and, if the monthly rental income after apportionment is CNY 100,000 or less, they are exempt from VAT.

A small-scale taxpayer may choose to report to the tax authorities monthly or quarterly. Once they choose, however, they may not change their reporting period for one fiscal year.

As for general taxpayers, those with cumulative sales of CNY 5 million or less for 12 consecutive months (if they report on a monthly basis) or for the four consecutive quarters (if they report quarterly) before the re-registration date, they may choose to re-register as a small-scale taxpayer before 31 December 2019.

Impact of the Changes

  • Further reduction of the tax burden on small-scale taxpayers
    In addition to the VAT exemption, the authority is considering giving small-scale taxpayers preferential tax treatment for various other taxes, such as the Urban Maintenance and Construction Tax, the Education Surcharge and Local Education Surcharge, Property Tax, Urban Land Use Tax, Stamp Tax (Declarations), and the Cultivated Land Occupation Tax.
  • General taxpayers’ ability to re-register as small-scale taxpayers
    Previously, general taxpayers could not re-register as small-scale taxpayers. As noted above, from 1 January, 2019, however, they can. In another words, entities can now register under whichever category is more beneficial to them. If a general taxpayer registers as a small-scale taxpayer, the tax reduction will apply to them from the month they become a small-scale taxpayer and their tax burden should be significantly reduced.

Our recommendation

Because tax in China can be complicated, we suggest businesses engage professional tax consultants for the following:

  • Tax advisory services – for help minimizing their tax burden, including help evaluating the pros and cons of re-registering as a small-scale taxpayer; and
  • Tax implementation services – for help reaching their goals quickly.

BDO in China is experienced in providing international and national tax services. We keep up with China’s rapidly changing regulatory environment and we keep our clients posted on important changes.

For further information in relation to any of the topics describe here, please do not hesitate to contact us.

Gordon Gao
[email protected]

Janet Liu
[email protected]