New VAT Reduction Policies Implemented Since April 1, 2019
On March 20, 2019, the Ministry of Finance, the State Administration of Taxation, and the State Administration of Customs jointly issued an Announcement on Policies Deepening Reform of Value Added Tax ( No.39, the “Announcement 39”). The State Administration of Taxation Announcement No. 14 and its interpretation followed accordingly on March 21, 2019, regarding formalities such as invoice issuance, the transition period, and documents required for application.
Aiming to reduce VAT tax burden, Announcement 39 can be broken down into the following three parts. The tax reduction policies below were implemented on April 1, 2019, and are presently in force.
- Lower VAT rates
- Direct reduction of VAT rates
The original VAT rates have been reduced from 16% to 13% (on general sale/import of goods, processing, repairing and replacing services, lease of tangible assets), from 10% to 9% (on transport, mail, basic telecommunication, construction, lease of real estate, sale of real estate, transfer of land use right, sale or import of low rate goods), while the 6% tax rate (on other services and transfer of intangible assets) remains unchanged.
After these changes, China currently has only 3 VAT rates: 6%, 9% and 13% (aside from zero rate and 3% for small scale taxpayers). According to the 2018 Government Work Report, which proposed adjusting VAT in multiple stages, we can expect that VAT rates may continue to change in the future.
- Reduced Input Deduction Rate for Purchased Agricultural Products
For taxpayers who purchase primary agricultural products, the original 10% deduction rate is now changed to 9%. If the purchased agricultural products are used for production or processing with the 13% VAT rate (previously 16%), the original 12% is now changed to 10%.
- Reduced Export Tax Refund Rate and Departure Goods Tax Refund Rate
The export tax refund rate and departure goods tax refund rate have been as well. The export tax refund rate has been reduced to 13% for goods on which the VAT rate and export tax refund rate was originally 16% VAT, and reduced to 9% where 10% was applied. For foreign travelers’ departure goods, the tax refund rate has been reduced to 11% where the 13% VAT was applied and reduced to 8% where the 9% was applied.
It is of note that both of these rates are subject to a transition period, which ends June 30, 2019. The corresponding tax refund rates shall be the old ones if the old VAT rates were applied when purchasing, and the new ones if the new rates were applied upon purchasing.
- Expanded the Scope of Deductions
Deductions in a number of areas were expanded in scope and applicability. For example, input VAT on real estate is now allowed to be deducted at one time. Also, domestic passenger transportation services are included in input deduction for the first time, which will bring great discounts to enterprises with travel business. Moreover, for certain taxpayers, the input VAT can have an additional deduction of 10% prior to December 31, 2021.
- Expanded the Tax Refund System for End-of-Term VAT Credit
Subject to certain conditions specified in Announcement 39, all qualified taxpayers can apply for refund of the end-of-term VAT credit, and there are no longer industry distinctions. One of the major conditions is that the tax credit must be positive for six months consecutively and the tax credit gained in the sixth month must exceed 500,000 RMB.
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