THE DISTINCTION BETWEEN SMALL-SCALE TAXPAYER AND GENERAL TAXPAYER STATUS IN CHINA AND EFFECTS ON HANDLING VAT PAYMENTS


Date: 28 May 2020 | Tags: Corporate Finance, VAT | Written by: Dr. Richard van Ostende | Reading time: 4 minutes


INTRODUCTION

In China distinction between taxpayers is made based on their annual revenue. Companies with an annual revenue not exceeding RMB 5 million are considered small-scale taxpayers and when an annual revenue over RMB 5 million is realized, companies are considered to have obtained general taxpayer status. In this article the main differences between small-scale taxpayer and general taxpayer status is discussed.


SMALL-SCALE TAXPAYER STATUS

Companies with an annual revenue not exceeding RMB 5 million are subject to VAT levy of three (3) percent of their sales value, which is lower compared to the VAT rates applicable to the general taxpayer status. However, unlike applicable to the general taxpayer status companies with a small-scale taxpayer status are not able to offset Output VAT with Input VAT to determine the VAT payable.

Small-scale taxpayers can choose to pay VAT per month or per quarter. Once a decision on payment frequency has been made it cannot be changed during the course of a fiscal period, which starts at 1 January and ends at 31 December of a calendar year.

If the monthly taxable sales does not exceed RMB 100.000 or quarterly taxable sales RMB 300.000, the small-scale taxpayer is exempt from VAT payment for the respective month. Further, if a small-scale taxpayers’ taxable monthly sales exceeds RMB 100.000, but after deducting the value of sales of real estate is less than RMB 100.000, its sales of goods, labor services, services, and intangible assets are exempt from VAT as well.

If the monthly taxable sales of small-scale taxpayers does not exceed RMB 100.000, the company can apply for a refund for the tax paid for the issuance of special VAT invoices in the current period may be recovered after all the VAT special invoices or the special red invoices (for the purpose of issuing credit notes) are issued in accordance with the regulations.


GENERAL TAXPAYER STATUS

Companies with an annual revenue of RMB 5 million or more qualify for general taxpayer status. The revenue is subject to VAT levy of thirteen (13), ten (10) or six (6) percent, depending on the nature of business activities. The main activities per tax bracket are listed in Figure 1 below.



Companies with general taxpayer status are required to settle VAT on a monthly basis. The VAT payable is the difference between Output VAT minus Input VAT. Output VAT is the VAT charged to customers when invoicing for goods or services rendered, and Input VAT is the VAT paid by the company for the purchase of goods or services.

If a company with a general taxpayer status realizes an annual revenue of less than RMB 5 million, it has the possibility to apply for small-scale taxpayer status.


SOURCES

  • State Administration of Taxation, Ministry of Finance of the People’s Republic of China (2020). Announcement on extending the implementation period of the VAT reduction and exemption policy for small-scale taxpayers. (SAT [2020] No. 24)
  • State Administration of Taxation, Ministry of Finance of the People’s Republic of China (2020). Announcement on Supporting the Value-added Tax Policy for the Reinstatement of Individual Industrial and Commercial Households. (SAT [2020] No. 13)
  • State Administration of Taxation, Ministry of Finance of the People’s Republic of China. Announcement on Relevant Policies for Deepening Value-Added Tax Reform. (SAT [2019] No. 39).
  • State Administration of Taxation of the People’s Republic of China (2019). Announcement on Issues Concerning Tax Collection and Administration of Tax Exemption for Small-Scale Taxpayers. (SAT [2019] No. 4)


The information in this article is intended for general information on the subject matter. The content of this article is not intended to replace professional advice on the subject matter in relation to your specific circumstances.

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