Provisional
Regulation of the People‘s Republic of
China on Value-added Tax
(Adopted by the 12th Executive Meeting of the State Council on
November 26, 1993, promulgated by Decree No.134 of the State
Council of the People‘s Republic of
China on December 13, 1993, and effective on January 1, 1994)
Article 1
All units and individuals which and who, in the territory of the
People‘s Republic of
China, sell goods, render services such as processing, repair and
spare parts replacement, or import goods, shall be the taxpayers
of value-added tax (hereinafter referred to as
"taxpayers"), and should pay the value-added tax in
accordance with this Regulation.
Article 2
The value-added tax rate shall be --
1. 17% for the taxpayers
selling or importing goods, except as otherwise provided for in
this Article (2) and (3). or
2. 13% for the taxpayers
selling or importing the following goods:
(1) grains, edible
vegetable oils;
(2) tap water,
heating, air conditioning, hot water, coal gas, liquefied
petroleum gas, natural gas, methane gas,
coal/charcoal
products for household use;
(3) books,
newspapers, magazines;
(4) feeds,
chemical fertilizer, agricultural chemicals, agricultural
machinery, plastic film for farming purposes;
(5) other goods
laid down by the State Council. or
3. zero for the taxpayers
exporting
goods, except as otherwise provided for
by the State Council. or
4. 17% for the taxpayers
rendering
services such as processing, repair or
spare parts replacement
(hereinafter
referred to as the "taxable service").
Any adjustment to the tax rate shall be made only by the State
Council.
Article 3
A taxpayer dealing in goods or taxable services under different
tax rates shall be required to separately calculate his sales
amount of goods or taxable services under different tax rates. If
he fails to make such calculation, the highest tax rate shall be
applicable.
Article 4
Except as otherwise provided for in Article 13 of this
Regulation, the value-added tax chargeable on the goods sold or
taxable services rendered by the taxpayer (hereinafter referred
to as the "sale of goods or taxable services") shall be
the amount remaining from the sales tax amount of current period after deducting
the purchases tax amount of current period. Its formula is
as follows:
Value-added Tax =
Sales Tax Amount of Current Period - Purchases Tax Amount of
Current Period
If the sales tax amount of current period is less than, and
insufficient to offset against, the purchases tax amount of
current period, the excess amount of purchases tax may be carried
forward for set-off in the subsequent period.
Article 5
The sales tax amount of the taxpayer selling goods or taxable
services shall be the amount of value-added tax which is assessed
in accordance with the sales amount and the tax rate set out in
Article 2 of this Regulation and collected from the purchaser.
Its formula is as follows:
Sales Tax Amount =
Sales Amount X Tax Rate
Article 6
The sales amount shall be the total costs plus all other charges
received from the purchasers by the taxpayer selling goods or
taxable services, not including the sales tax amount received.
The sales amount shall be calculated in Renminbi. The sales
amount in foreign currency of a taxpayer shall be converted into
the amount in Renminbi in accordance with the exchange rate
prevailing in the foreign exchange market for such calculation.
Article 7
If the price of the goods or taxable services sold by the
taxpayer is obviously low without proper reasons, the competent
tax authority shall calculate his sales amount.
Article 8
The purchases tax amount shall be the amount of value-added tax
which is paid or borne by the taxpayer buying goods or receiving
taxable services (hereinafter referred to as the "purchase
of goods or taxable services").
BRIEFING OF VAT UNDER CHINA’S TAX SYSTEM
Tax Policy Department
Ministry of finance of P.R.China
China started to implement VAT in 1984 on 24 specified taxable
items. In 1994,corresponding with reform goal of building up
socialist market economy system and pursuant to the guideline of
"unification of taxation management, equity of tax burden,
simplification of tax system, reasonalization of revenue
distribution relations and guarantee of the financial
revenue", the former taxation system undertook an overall
and structure reform. On December 13, 1993, The State Council of
China promulgated “The Provisional Regulation of the
People’s Republic of China on Value Added
Tax”，which put into effect on January
1, 1994 and is currently effective in China.
VAT is administered by the State Administration of Taxation (the
import VAT is collected by the customs on behalf), and the
revenue from it is shared between the central government (75%)
and local governments (25%). VAT is the major source of fiscal
revenue for the Government of China, particularly the central
government. In 2002, the revenue from VAT is 814.1 billion Yuan,
accounting for 47.61% of the state total tax revenue of the year,
which is the first biggest tax in China.
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1. The current VAT system of China
Taxpayers
According to The Provisional Regulation of P.R.C on VAT,
Value-added tax should be paid by enterprises or individuals who
sell merchandise, provide processing, repairing, or assembling
service, or import goods within the territory of the People's
Republic of China on the added value derived from their
production, selling merchandise, providing industrial repairing
or assembling service.
Taxable items and tax rates
Based on different taxable goods, services, different flat rates
and zero rate are adopted. The table of the taxable items and
rates is as following:
Table of VAT Taxable Items and Rates
| Coverage of collection | Rate |
| Exportation of goods(except otherwise stimulated by the state) | 0 |
| Agriculture,
forestry, products of animal husbandry, aquatic products; Edible vegetable and grain duplicates; Tap water, heating, cooling, hot air supplying, hot water, gas, liquefied petroleum gas, natural gas, coal/charcoal products for household use; Book, newspapers, magazines(excluding the newspapers and magazines distributed by the post department) Feeds, chemical fertilizers, agricultural chemicals, agricultural machinery and plastic converting film for farming; Selected metal mineral products, Selected non-metal mineral products, coal. |
13% |
| Crude oil, mine
salt and goods other than those listed above; Taxable services. |
17% |
Computation of tax
payable
There are two kinds of VAT taxpayer in China by the criterion of
turnover of sale goods & services and condition of accounting
system.
One is normal taxpayer, the other is small taxpayer.
The standard of decision of Small Taxpayer is①where the taxpayer is engaged in
the production of goods or in the provision of taxable services
as his sole or principal business and his annual turnover is less
than RMB ･1,000,000; or ②where the taxpayer is engaged in
the wholesale or retail of goods and his annual turnover is less
than RMB ･ 1,800,000. However, A Small
taxpayer who maintains a sound accounting system and is able to
provide accurate accounting records for taxation purposes may be
registered as a General Taxpayer.
A. Normal taxpayer
To compute the VAT payable, the normal taxpayer needs to
separately calculate the output tax and the input tax for the
current period. Then the difference between the output tax and
the input tax shall be the actual amount of VAT payable. The
formula for computing the tax payable is:
Tax payable=Output tax payable for the current period－Input tax payable for the current
period
Output tax payable=Sales volume in the current periodﾗApplicable tax rate.
B. Small taxpayer
Small taxpayers are taxed on the basis of the revenue derived
from sales of goods or provision of taxable services by applying
proper rates(4% for commercial sector, and 6% for other sectors).
The computing formula of tax payable is:? Tax payable=Sales amountﾗApplicable rate.
C. Importation
The importation goods are taxed on the basis of the composite
assessable price by applying the applicable tax rate. The formula
for computing the tax payable is:
Tax payable=Composite assessable priceﾗApplicable VAT rate
Composite assessable price=Customs completion price＋Custom Duty
Where the taxpayers import the taxable goods under the
Consumption Tax, the Consumption Tax payable shall be included in
the composite assessable price.
D. VAT refund for exporters
In case of 0 rate applicable to the exported goods, the exporters
may apply to the tax authorities for the input tax refund on
those goods exported. At present, the refund rates consist of 3%,
5%, 8%, 13% and 17%.
Major tax exemptions
The exempted items include: the agricultural production materials
as ruled, the self-produced primary agricultural products sold by
agricultural producing units and individuals; contraceptive
medicines and devices; antique books purchased from the public;
instruments and equipment imported for direct use in scientific
research, experiment and education; imported materials and
equipment granted, gifted by foreign governments or international
organizations; materials imported directly to support the poverty
relief and charity cause donated freely by overseas natural
persons, legal persons and other organizations; articles imported
directly by organizations for the disabled for exclusive use by
the disabled; and the taxable services provided by individual
disabled laborers.
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2. The main problems of VAT
Broadly speaking, there are three major types of value added
taxes in the world corresponding to the gross national product,
net national product, and consumption basis. They are the GNP
type, income type and the consumption type. In China, the type of
VAT is the GNP type. That is to say, the input tax of
fixed-assets, such as houses, construction and equipment, can’t be deducted from the output tax
when computing the tax payable. The VAT of GNP type ensures that
the government can get more tax revenue, but would limit the
increase of investment. Thus, this is one problem of China’s VAT that should be settled in
the short future.
Secondly, in some industries of China, such as construction,
transportation, and services etc, the state doesn’t collect VAT but Business Tax.
Business Tax is levied as a percentage of sales, not just value
added. In China, Taxable services for Business Tax is include
transportation, construction, finance and insurance, post and
telecommunications, cultural activities and sports, entertainment
businesses and services. It is not equitable and increases the
difficulties of computing taxes that different industries are
levied on different type of tax.
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3. The preparative reform for VAT in China
For making an equitable market environment and stimulating the
investment, the government of China prepares to make a reform of
VAT, which will change the type of China’s VAT from the GNP type to the
consumption type. On July 1, 2004, the state selected several
north-east provinces as experimental area to implement the VAT of
consumption type. In these provinces, the tax payers of VAT in
eight selected industries can deduct the input tax of equipment
used for production. With the development of Chinese economy and
the increase of reform experiences, the central government will
implement the VAT reform in all industries and provinces of
China. What’s more, for setting up a uniform
and equitable turnover tax system, some industries subjected to
Business Tax would be levied on VAT at an opportune time.