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China’s small business VAT exemptions in 2023

Since the start of the pandemic, China has attempted to ease the tax burden on small businesses, and that looks set to continue

by Robynne Tindall
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China will exempt small businesses with monthly sales of RMB 100,000 or less, as well as taxpayers in specific industries such as lifestyle services, from value-added tax (VAT) throughout 2023. Kristina Koehler-Coluccia, Head of Business Advisory at Woodburn Accountants & Advisors, explains more

The VAT incentives are meant to help vulnerable businesses overcome the difficulties of the Covid-19 pandemic and represent an extension of previous policies. A wide range of tax incentives and cuts have been put in place in China in the past few years to encourage and support economic growth.

launchpad CBBC

In 2022, the country implemented record-high value-added tax credit refunds, which totalled about 2.4 trillion yuan. The new VAT exemption and reduction policies will be valid from 1 January 2023 to 31 December 2023.

If a small business has monthly sales under RMB 100,000 (approx. $14,740), or if the quarterly sales are under RMB 300,000 (approx. $44,220) for taxpayers who choose one quarter as a tax payment period, the taxpayer will not be subject to VAT.

This represents a lower threshold than in 2021 and 2022. During the period from 1 April 2021 to 31 December 2022, the VAT limit for small-scale taxpayers was RMB 150,000 (approx. $22,110) per month (or RMB 450,000 per quarter, approx. $66,300).

The VAT administration notice clarifies that small-scale taxpayers with total monthly sales of over RMB 100,000 – but whose sales when excluding real estate sales occurring in the current period is less than RMB 100,000 – will be exempt from paying VAT on the sale of goods, labour services and intangible assets.

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Small businesses can choose to waive the VAT exemption incentive and instead issue special VAT invoices for a specific sale.

Between 1 January 2023 and 31 December 2023, small-scale taxpayers that are subject to a VAT levy rate of 3% can enjoy a reduced levy rate of 1%. The VAT items subject to a 3% VAT prepayment rate will enjoy a reduced prepayment rate of 1%.

An additional VAT deduction policy has also been issued for lifestyle and production-oriented services in 2023. Taxpayers in these sectors can enjoy 5% additional VAT deductions based on the deductible input VAT in the current period. Taxpayers in the lifestyle services sector can enjoy 10% additional VAT deductions based on the deductible input VAT in the current period. Production-oriented services include ‘postal services’, ‘telecommunication services’, ‘modern services’ and ‘lifestyle services’. Taxpayers in these sectors must have sales from ‘lifestyle services’ that represent more than 50% of their total sales.

Previously, taxpayers in the postal, telecommunications, modern services and lifestyle services industries were granted a 10% additional VAT deduction based on the deductible input VAT between 1 April 2019 and 31 December 2021, and taxpayers in lifestyle services enjoyed a 15% additional VAT deduction from 1 October 2019 to 31 December 2021. Tax authorities in China extended this additional VAT deduction policy to 31 December 2022.

In recent years, a key aspect of China’s new tax rules and policy directions has been tax incentives and cuts to boost the economy and encourage investment and research and development activities. At the same time, China is also making efforts to improve its tax administration environment, in particular the administration of transfer pricing issues relating to multinational enterprises.

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The strict Covid-19 prevention measures imposed under China’s zero-covid policy significantly affected businesses and the economy in general. However, since the government decided to lift restrictions and quarantines, experts have raised their forecasts for China’s real GDP growth to 5.2% in 2023 (from 4.7%).

Adapting to a new reality and possible repeated surges of covid cases will be challenging for China. The government will have to consider creative ways to get the country’s economy back on track and rebuild businesses and investors’ confidence.

According to analysts, China may decide to extend most of the tax incentives that it has offered in the past, at least until the end of 2023. With respect to tax audits, there has also been a comparatively calmer tax audit environment in the past three years. However, China will continue to focus on improving its tax enforcement.

Tax authorities may become more aggressive in their enforcement activities in the future in order to plug the gap in tax revenue collection created by a slower economy and to make up for the reduction in tax revenue arising from various tax cut measures.

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to connect with CBBC staff who can advise on company chops and other Chinese legal requirements.

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