China Issued 2023 VAT Policies and Exemptions for Small Businesses

Effective January 1, 2023, through December 31, 2023, the Ministry of Finance and State Taxation Administration have clarified Value-Added Tax (VAT) exemptions and policies for small-scale VAT taxpayers. This includes an exemption for small businesses with monthly sales of 100,000 yuan (approximately $14,790) or less from VAT as part of the newly announced measures. Additional VAT deduction policies for taxpayers operating in the production and lifestyle services sectors have also been outlined.

The expansion of these programs, which aims to support disadvantaged firms affected by the COVID-19 pandemic, is expected to positively impact China’s economy in 2023. China has implemented a wide range of tax and fee reductions throughout the years as part of efforts to stimulate economic growth. The nation implemented record-breaking value-added tax credit refunds in 2022, amounting to roughly 2.4 trillion yuan.
The 2023 policies aimed at small-scale taxpayers, the State Taxation Administration also released guidance on the implementation and enforcement of Value-Added Tax (VAT) reduction and exemption policies for small-scale VAT taxpayers through a notice titled “Notice on Matters Relating to the Collection and Administration of VAT Reduction and Exemption Policies for Small-Scale VAT Taxpayers” which provides further details on the regulations and procedures of the VAT collection and administration.

 

China Ministry Of Finance
China Ministry of Finance (MOF) announced VAT deductions for small-scale taxpayers effective January 1, 2023.

 

In 2023, small-scale taxpayers will not be subject to VAT if they meet specific criteria. Specifically, if a small-scale taxpayer’s monthly sales are less than RMB 100,000 (approximately $14,740) or if the taxpayer chooses to pay VAT on a quarterly basis and their quarterly sales are less than RMB 300,000 (roughly $44,220), the taxpayer will be exempt from VAT.

In addition to the VAT exemption for small-scale taxpayers based on monthly or quarterly sales, there is also an option for small-scale taxpayers to waive the VAT exemption incentive for specific sales. Under this option, the small-scale taxpayer can choose to issue special VAT invoices instead of claiming the exemption. It allows small-scale taxpayers to determine which sales they want to apply for the VAT exemptions and issue special VAT invoices for the remaining sales. Small business owners can better control their tax obligations and maintain compliance while maintaining cash flow.

The small-scale taxpayer policies announced also provide for a reduction in the VAT levy rate for small-scale taxpayers from 3 percent to 1 percent. This applies to small-scale taxpayers that are subject to a 3 percent VAT levy rate during this period. Additionally, for the items that are subject to a 3 percent VAT prepayment rate, the policies also allow for a reduced prepayment rate of 1 percent.

Additional VAT Deductions 

Additional VAT reduction has been provided for lifestyle and production services between January 1, 2023, and December 31, 2023.
  • Specifically, taxpayers in the production services industry, such as postal services, telecommunications services, modern services, and lifestyle services, can enjoy an additional 5 percent VAT deduction based on the deductible input VAT in the current period if the sales from “four services” account for more than 50 percent of their total sales. 
  • Taxpayers in the lifestyle services industry, whose sales from ‘lifestyle services’ account for more than 50 percent of their total sales, can enjoy an additional 10 percent VAT deduction based on the deductible input VAT in the current period.
This measure aims to provide additional support for businesses in these sectors, which have been affected by the pandemic.

Our Take: VAT incentives for small-scale taxpayers and additional relief for certain sectors are a continuation of the relief measures provided in previous years. They are targeted toward certain businesses and individuals, usually small-scale taxpayers, to support them in complying with their VAT obligations and keeping their businesses running. The continuation of the incentives in 2023 means that these measures will still be in place, but they will be implemented on a smaller scale than in previous years, which could mean the eligibility for the incentives is more restrictive or that the amount of the incentives is lower.

These measures align with the country’s economic recovery and GDP growth strategy after the pandemic.

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