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Small businesses in China get new VAT exemption

18 May 2022

Jack Yan

General Manager, Intertrust Group Shanghai

Jack Yan

General Manager, Intertrust Group Shanghai

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China’s new VAT regulations are good news for SMEs, but add to the complexity of VAT administration and accounting

Small-scale taxpayers in China who were subject to 3% Value Added Tax (VAT) are now exempt from VAT altogether. Prepayment of VAT has also been suspended.

The new rules, which came into force at the beginning of April, continue the Chinese government’s long-standing policy of creating a friendly tax environment for small and micro-businesses.

Smaller businesses are hugely important to China’s economy thanks to the rapid growth of micro and small enterprises (MSEs) in past few years, which account for the majority of non-government employment

China is reckoned to have about 44 million micro and small enterprises (MSEs), a category that covers all businesses with annual incomes up to CNY3mn (USD460,000).

China’s VAT support for small business

While larger enterprises have rebounded strongly from the pandemic, many smaller businesses have struggled. So new tax measures to support the sector are well timed.

China’s VAT exemption will apply to businesses in all industries that are classified as small-scale taxpayers and subject to the 3% VAT rate.

In addition, the Ministry of Finance (MOF) and State Taxation Administration (STA) have announced a major boost to the tax reduction scheme.

This measure is also targeted at micro businesses and small firms in all sectors, as well as larger players in all industries.

China’s total VAT refunds will reach CNY1.5trn this year, according to the MOF.

What China’s VAT changes mean for your business

The new regulations are entirely straightforward. If you are an eligible small business now exempt from the 3% VAT rate, there will be no VAT to pay starting from the April 2022 tax period.

At the same time, normal accounting standards for small-scale taxpayers continue to apply.

For example, exempt businesses are required to issue ordinary tax-exemption invoices showing a zero VAT rate as necessary.

Taxpayers who choose to waive the tax exemption are required to issue special VAT invoices with a rate of 3%.

The VAT exemption is effective for new invoices issued from 1 April 2022. In case of sales discounts or refunds after this date, the 3% VAT rate will continue to apply since it refers to transactions made before 1 April.

The impact of the changes on standard monthly or quarterly reporting will have to be carefully calculated and administered.

All this can be time-consuming and confusing for small and medium-sized businesses facing cash flow pressures, while fighting to remain viable and profitable.

The new VAT measures are a valuable contribution to a tax-friendly small business environment. But they may require a significant amount of administration and oversight from the billing company.

How Intertrust Group can help with China’s VAT rules

Intertrust Group has the expertise to help businesses navigate the complexity of China’s VAT regulations.

  • We can handle all recurring tax filing services for clients, taking the new regulations into account and updating tax calculations accordingly.
  • We offer a complete VAT registration and administration service. China’s VAT is being streamlined, with further changes expected. We can keep on top of these changes for you, ensuring you are compliant and able to take full advantage of any benefits and exemptions.
  • We can help you avoid falling foul of complex local rules without having to hire expensive in-house resources on the ground.
  • Intertrust Group is a publicly listed company with 70 years’ experience in providing world-class trust and corporate services to clients around the world.