Issue6Interim Regulations to Be Upgraded to a Law: Draft VAT Law Released for Public Comment
AS one of the most important taxes in China, the Interim Regulations of the People's Republic of China on Value-added Tax (VAT) (hereinafter referred to as the “Interim Regulations”) has been in China’s tax development process for 26 years since they were promulgated by the State Council on December 13, 1993. There have always been people calling for upgrading the status of VAT regulations from "regulations" to a "law". On the November 27, 2019, the Law of the People's Republic of China Value Added Tax Law (Draft for Comment) (hereinafter referred to as the "Draft for Comment") jointly drafted by the Ministry of Finance and the State Taxation Administration was released to solicit opinions from the public. In this article, relevant articles of the currently effective Interim Regulations are compared with those of the Draft for Comment to better show the key content of this draft legislation.
1. Scope of Taxation
2. Taxpayers and Withholding Agents
3. Tax Rates and Levying Rates
4. Sales Value
5. Tax Refund System at the End of the Period
6. Provisions on Mixed Sales and Concurrent Operations
7. Tax Relief
8. Tax Period
9. Administration of Tax Collection
10. Arrangements for the Transition Period
1. Scope of Taxation
The Draft for Comment basically maintains the provisions of the Interim Regulations. In order to consolidate the results of the reform of levying VAT in lieu of business tax, "labor services of processing, repairs or maintenance” are incorporated into "services", and "sale of financial commodities" is separately listed in "services", that is, the scope of taxation includes the sales of goods, services, intangible assets, real estate and financial commodities, and the import of goods within the territory.
Draft for Comment
Interim Regulations
Article 1 In the case of transactions with value-added tax payable ("taxable transactions") as well as the import of goods within the territory of the People's Republic of China ("within the territory"), the value-added tax shall be paid in accordance with the Law.
Article 8 Taxable transactions refer to sales of goods, services, intangible assets, real estate and financial commodities.The sales of goods, real estate and financial commodities refer to the paid transfer of ownership of goods, real estate and financial commodities.
The sales of services refer to the paid provision of services.
The sales of intangible assets refer to the paid transfer of ownership or use right of intangible assets.
Article 1 Entities and individuals selling goods, providing labor services of processing, repairs or maintenance (hereinafter referred to as the "labor services"), or selling services, intangible assets or real property in China, or importing goods to China, shall be identified as taxpayers of value-added tax, and shall pay value-added tax under these Regulations.
2. Taxpayers and Withholding Agents
By referring to international experience, the Draft for Comment stipulates that entities and individuals that have taxable transactions within the territory and whose sales have reached the threshold for levying VAT, as well as the consignees of imported goods, are VAT taxpayers. Entities and individuals whose sales have not reached the threshold for levying VAT are not VAT taxpayers, but can voluntarily choose to register as VAT taxpayers to pay VAT. In the event that a taxable transaction occurs between a foreign entity and an individual within the territory, the purchaser shall be the withholding agent.
Draft for Comment
Interim Regulations
Article 5 Entities and individuals that conduct the taxable transactions within the territory and with a sales value reaching the threshold for levying value-added tax, as well as consignees of imported goods are taxpayers of value-added tax.
The threshold for levying value-added tax is the quarterly sales value of CNY300,000.
Entities and individuals with a sales value not reaching the threshold for levying value-added tax are not taxpayers specified hereunder, but they may voluntarily opt to pay value-added tax in accordance with the Law.
Article 1 Entities and individuals selling goods, providing labor services of processing, repairs or maintenance (hereinafter referred to as the "labor services"), or selling services, intangible assets or real property in China, or importing goods to China, shall be identified as taxpayers of value-added tax, and shall pay value-added tax under these Regulations.
Article 17 Taxpayers whose sales value does not reach the threshold for levying value-added tax as specified by the finance and tax division of the State Council shall be exempted from value-added tax. Those whose sales value has reached the aforesaid threshold shall be bound to calculate and pay value-added tax under these Regulations.
3. Tax Rates and Levying Rates
In order to consolidate the results of the reform of levying VAT in lieu of business tax and deepen the results of the VAT reform, the Draft for Comment has made corresponding adjustments to the tax rates stipulated in the Interim Regulations, adjusting the applicable tax rate for the sales of goods, processing, repairs and maintenance services, tangible movable property leasing services, and the import of goods to 13%; adjusting the applicable tax rate for the sales of transport services, postal services, basic telecom services, construction services, real property leasing services, sale of real property, transfer of land use rights, sales or import of agricultural products, etc. to 9%; the applicable tax rate for the sales of services, intangible assets or financial commodities remains at 6%. At the same time, it is clarified that the VAT levying rate is 3%.
Draft for Comment
Interim Regulations
Article 13 Value-added tax rates:
1. Taxpayers that sell goods, processing, repair, replacement or tangible personal property leasing services or import goods and do not fall within the scope as specified in Item 2, Item 4 or Item 5 of this Article shall be subject to a 13% tax rate.
2. Taxpayers that sell transport services, postal services, basic telecommunication services, construction services, or real property leasing services, sell real property, transfer land use rights, or sell or import the goods listed below and do not fall within the scope as specified in Item 4 or Item 5 of this Article shall be subject to a 9% tax rate:
(1) agricultural products, edible vegetable oil, and common salt;
(2) tap water, heat supply, air-conditioning, hot water, gas, liquefied petroleum gas, natural gas, dimethyl ether, methane and civil-use coal products;
(3) books, newspapers, magazines, audio-visual products, and electronic publications; and
(4) feeds, chemical fertilizers, pesticides, agricultural machinery and mulching films.
3. Taxpayers that sell services, intangible assets or financial commodities and do not fall within the scope as specified in Item 1, Item 2 and Item 5 of this Article shall be subject to a 6% tax rate.
4. Taxpayers who export goods are subject to a zero tax rate, unless otherwise specified by the State Council.
5. Domestic entities and individuals that sell services or intangible assets under the scope specified by the State Council across borders are subject to a zero tax rate.
Article 14 The levying rate of the value-added tax is 3%.Article 2 Value-added tax rates:
1. Taxpayers that sell goods, labor services or tangible personal property leasing services or import goods and do not fall within the scope as specified in Item 2, Item 4 and Item 5 of this Article shall be subject to a 17% tax rate.
2. Taxpayers that sell transport services, postal services, basic telecommunications services, construction services, or real property leasing services, sell real property, transfer the land use right, or sell or import the goods listed below shall be subject to an 11% tax rate:
(1) Such agricultural products as grain, edible vegetable oil, and common salt;
(2) Tap water, heat supply, air-conditioning, hot water, gas, liquefied petroleum gas, natural gas, dimethyl ether, methane and civil-use coal products;
(3) Books, newspapers, magazines, audio-visual products, and electronic publications;
(4) Feeds, chemical fertilizers, pesticides, agricultural machineries and mulching films; and
(5) Other goods specified by the State Council.
3. Taxpayers that sell services or intangible assets and do not fall within the scope as specified in Item1, Item 2 and Item 5 of this Article shall be subject to a 6% tax rate.
4. Taxpayers who export goods are subject to a zero tax rate, unless otherwise specified by the State Council.
5. Domestic entities and individuals that sell services or intangible assets under the scope specified by the State Council across borders are subject to a zero tax rate.
Adjustments to the tax rates shall be decided by the State Council.
Article 12 Small-scale taxpayers shall be subject to the 3% value-added tax rate, unless otherwise stipulated by the State Council.
4. Sales Value
The Draft for Comment basically follows the current provisions of the Interim Regulations, clarifying that sales value means the related considerations obtained by taxpayers in taxable transactions, including all monetary or non-monetary economic benefits.
Draft for Comment
Interim Regulations
Article 15 Sales value refers to the consideration obtained by a taxpayer due to a taxable transaction, including all monetary or non-monetary economic benefits and excluding the output tax calculated as per the general tax calculation method and the taxable amount calculated as per the simplified tax calculation method.
Where the State Council provides that the sales value may be calculated by difference, such provisions shall prevail.
Article 16 Where any transaction is deemed as a taxable transaction and the sales value is in a non-monetary form, the sales value shall be determined as per the fair market value.
Article 17 Sales value shall be calculated in Renminbi. Taxpayers who sell goods in currencies other than Renminbi shall convert their sales value into Renminbi.Article 6 Sales value shall include the full price charged by taxpayers for their taxable sales activities plus additional fees and charges, but shall not include the output value-added tax.
Sales value shall be calculated in Renminbi. Taxpayers who sell goods in currencies other than Renminbi shall convert their sales value into Renminbi.
5. Tax Refund System at the End of the Period
In order to consolidate the results of the VAT reform, in accordance with the VAT principle and by referring to international experience, the Draft for Comment establishes a system of tax refund at the end of the period, and authorizes the finance and taxation authorities under the State Council to formulate specific measures.
Draft for Comment
Interim Regulations
Article 21 The taxable amount calculated as per the general tax calculation method refers to the balance of output tax offsetting input tax in the current period. The formula for the calculation of the taxable amount is as follows:
Taxable Amount = Output Tax in the Current Period - Input Tax in the Current Period
Where the input tax in the current period is more than the output tax in the current period, the balance may be carried forward to the next period for continuous deduction; or, be returned. Specific methods will be formulated by the competent departments for finance and taxation under the State Council.
The input tax shall be deducted by virtue of legitimate and effective vouchers.
Article 4 Except in circumstances specified in Article 11 of these Regulations, taxpayers' liability for selling goods, labor services, services, intangible assets, or real property (hereinafter referred to as the "taxable sales activities") shall amount to the balance after deducting input tax from output tax in the current period. The formula for the taxable amount is as follows:
Taxable Amount = Output Tax in the Current Period - Input Tax in the Current Period
Where output tax is less than input tax in the current period, the unutilized input tax may be carried forward to the subsequent period.
6. Provisions on Mixed Sales and Concurrent Operations
In order to consolidate the results of the reform of levying VAT in lieu of business tax, and to solve the tax-related problems in special circumstances encountered by the taxpayers, the Draft for Comment follows the concept of separately calculating "mixed sales values" and applying different tax rates for taxable transactions. The Draft for Comment clarifies that mixed sales shall apply the primary tax rate or levying rate, and sales values shall be separately calculated for taxable transactions subject to different tax rates or levying rates. If the sales values are not calculated separately, the higher applicable tax rate shall apply.
Draft for Comment
Interim Regulations
Article 26 Taxpayers who conduct taxable transactions subject to different tax rates or levying rates shall separately calculate the sales value based on the applicable tax rates or levying rates. Where the sales values are not calculated separately, the higher tax rate applies.
Article 27 Where one taxable transaction of a taxpayer involves two or more tax rates or levying rates, the primary tax rate or levying rate applies.
Article 3 Taxpayers concurrently engaging in trading items that are subject to VAT at different rates shall separately calculate the sales value of such items based on the applicable tax rates. Where the sales values are not calculated separately, the highest tax rate applies.
7. Tax Relief
The Draft for Comment follows the statutory tax exemption items in the Interim Regulations and in the original Interim Regulations on Business Tax; at the same time, it makes clears that in addition to the statutory tax exemption, where the taxpayer's business activities are significantly affected due to the needs of national economic and social development, or due to emergencies, the State Council may formulate special VAT preferential policies and report them to the Standing Committee of the National People's Congress for the record.
Draft for Comment
Interim Regulations
Article 29 The items listed below shall be exempted from value-added tax:
1. agricultural products produced and sold by agricultural producers themselves;
2. prophylactic drugs and devices;
3. antique books;
4. imported instruments and equipment to be directly used in scientific research, scientific experiments and teaching;
5. materials and equipment imported by foreign governments and international organizations for gratis aid;
6. products exclusively for the disabled directly imported by organizations for the disabled;
7. sales of goods used by sellers themselves;
8. nursing services provided by nurseries, kindergartens, homes for the aged and welfare institutions for the handicapped, matchmaking and funeral services;
9. services provided by individuals with disabilities;
10. medical services provided by hospitals, clinics and other medical institutions;
11. education services provided by schools and other education institutions, and services provided by students under a work-study program;
12. agricultural mechanical plough, irrigation and drainage, insect control, plant protection, agriculture and animal husbandry insurance as well as relevant technical training business, and the hybridization and disease prevention and treatment of poultry, livestock and aquatic animals;
13. ticket proceeds from cultural activities organized by memorials, museums, cultural centers, administrative institutions for heritage conservation units, arty galleries, exhibition centers, painting and calligraphy academies and libraries, and those from cultural and religious activities organized by religious venues; and
14. insurance products provided by domestic insurance agencies for exported goods.
Article 30 In addition to the provisions hereof, as per demands of national economic and social development or in the case of great influence of emergencies and other reasons on the business activities of taxpayers, the State Council may formulate special preferential policies of value-added tax, and report them to the Standing Committee of the Sixth National People's Congress for record-filing.Article 15 The items listed below shall be exempted from value-added tax:
1. Agricultural products produced and sold by agricultural producers themselves;
2. Prophylactic drugs and devices;
3. Antique books;
4. Imported instruments and equipment to be directly used in scientific research, scientific experiments and teaching;
5. Materials and equipment imported by foreign governments and international organizations for gratis aid;
6. Products exclusively for the disabled directly imported by organizations for the disabled; and
7. Sales of goods used by sellers themselves.
Except for those specified in the above Articles, items subject to exemption and deduction for value-added tax purposes shall be determined by the State Council. No localities or departments may decide exempted or deductible items.
8. Tax Period
In order to deepen the reform of “streamlining administration, delegating power and strengthening regulation, and upgrading services", further reduce the taxpayer's frequency of handling tax matters and reduce the taxpayer's burden on tax declaration, the Draft for Comment canceled the three tax periods of "1st, 3rd and 5th", and added a new "half-year" tax period.
Draft for Comment
Interim Regulations
Article 35 The value-added tax period shall be ten days, 15 days, one month, one quarter or half a year. The specific tax period of a taxpayer shall be determined by the competent taxation authority based on the taxable amount. The provision on the half-a-year tax period does not apply to taxpayers calculating the tax as per the general tax calculation method. A natural person who is unable to pay value-added tax on a periodical basis may pay tax after every single transaction.
Taxpayers whose tax periods are on a monthly, quarterly or half-a-year basis shall file tax returns within 15 days after the end of the tax period. Taxpayers whose tax periods are on the tenth or 15th day of each month shall pre-pay tax within five days after the end of the tax period, and, between the first and 15th days of the following month, file tax returns and settle the balance of the taxable amount for the previous month.
The periods for tax calculation and filing of tax returns for parties who have the obligation of withholding tax shall be fixed in line with the previous two paragraphs.
Taxpayers who import goods shall pay tax within 15 days after the Customs sends out the Customs Import Value-Added Tax Payment Notice.
Article 23 The value-added tax period shall be on the 1st, 3rd, 5th, 10th or 15th day of each month, or on a monthly or quarterly basis. The due date of value-added tax shall be determined by the competent taxation authorities based on the taxable amount. Taxpayers who are unable to pay value-added tax on a periodical basis may pay tax after every single transaction.
Taxpayers whose tax periods are on a monthly or quarterly basis shall file tax returns within 15 days of the end of the tax period. Taxpayers whose tax periods are on the 1st, 3rd, 5th, 10th or 15th day of each month shall pre-pay tax within 5 days of the end of the tax period, and, between the 1st and 15th days of the following month, file tax returns and settle the balance of the taxable amount for the previous month.
The tax periods for parties who are obliged to withhold tax shall be fixed in line with the previous two paragraphs.
9. Administration of Tax Collection
In combination with the practice of tax collection administration, the Draft for Comment clearly states that VAT shall be levied by the tax authorities, and VAT on imported goods shall be levied by the customs on behalf of the tax authorities. The Draft for Comment clarifies the principles of truthful declaration obligations, invoice management and legal liabilities of taxpayers and withholding agents.
Draft for Comment
Interim Regulations
Article 36 Value-added tax shall be levied by tax authorities. The tax authorities entrust the Customs to levy value-added tax on imported goods by proxy.
The Customs shall share the information on the value-added tax levied by proxy and the tax declaration for exported goods with tax authorities.
The calculation and levying methods of value-added tax on articles carried or posted by individuals to China will be formulated by the State Council.
Article 37 A taxpayer shall faithfully file value-added tax returns with the competent tax authority, and submit the value-added tax returns and relevant tax payment materials.Where a taxpayer exporting goods, services or intangible assets is subject to zero tax rate, the taxpayer shall declare a tax refund (exemption) to the competent tax authority. The practical rules shall be drafted by the competent department for taxation under the State Council.
The party who has the obligation to withhold tax shall faithfully submit the withholding and payment report form as well as other relevant materials required by the tax authority according to the actual needs.
Article 38 Two or more taxpayers meeting the stipulated conditions may be consolidated for tax payment. The practical rules shall be drafted by the competent departments for finance and taxation under the State Council.
Article 39 In the case of a taxable transaction, a taxpayer shall faithfully issue an invoice.
Article 40 A taxpayer shall use invoices as per provisions. Where any taxpayer fails to use an invoice as per provisions, punishments will be imposed as per the relevant laws and administrative regulations. If the circumstances are serious and a crime is constituted, the taxpayer shall be investigated for criminal liability according to laws.
Article 41 A taxpayer shall issue value-added tax invoices by tax-control facilities.
Article 42 A tax authority shall be entitled to conduct tax inspections in terms of the use of invoices, tax declaration, tax exemption and deduction and so on of taxpayers.
Article 43 A taxpayer shall pay the value-added tax as per provisions, with specific measures to the formulated by the State Council.
Article 44 The relevant departments of the State shall coordinate with tax authorities regarding value-added tax management activities according to laws, administrative regulations and respective duties. Tax authorities, banks, the Customs, foreign exchange administrations, market supervision departments and so on shall establish a value-added tax information sharing and work coordination mechanism, and strengthen the value-added tax levying and administration.Article 20 Value-added tax shall be levied by the taxation authorities. Value-added tax on imported goods shall be levied by Customs.
Value-added tax on articles carried or posted by individuals to China for personal consumption shall be calculated and levied together with customs duties. The practical rules shall be drafted by the Customs Tariff Commission of the State Council jointly with the departments concerned.
Article 25 Taxpayers who are qualified by the rules governing tax refunds (exemption) for exported goods shall complete the export procedures with Customs, and may apply for the tax refunds (exemption) for the exported goods in question to the competent taxation authorities on a monthly basis by producing the related export declaration documents and other evidence within the filing period as specified in the export tax refund (exemption) rules; domestic entities and individuals that sell services and intangible assets across borders and are eligible for the provisions concerning tax refund (exemption) shall apply to the competent taxation authorities on schedule for the tax to be refunded (exempted). The practical rules shall be drafted by the divisions of finance and tax of the State Council.If exported goods are returned or withdrawn from Customs, the taxpayers in question shall pay back tax refunds in accordance with the relevant statutory requirements.
Article 21 When carrying on taxable sales activities, taxpayers shall issue value-added tax special invoices upon the request of buyers, and shall print the sales value and output tax amount on such value-added tax special invoices.Value-added tax special invoices shall not be issued in the following circumstances:
1. The purchase of taxable sales activities by individual consumers; or
2. The application of VAT exemption rules to taxable sales activities.
Article 26 Value-added tax shall be levied and administered under the Tax Levy and Administration Law of the People's Republic of China and these Regulations.
Article 27 Where there are other provisions concerning matters about value-added tax payments by taxpayers, as separately announced by the State Council or by the competent taxation authority or the competent finance authority under the State Council upon approval of the State Council, such provisions shall prevail.
10. Arrangements for the Transition Period
For a smooth transition, tax policies introduced before the promulgation of this Law, if really need to be extended, may be extended up to five years after the implementation of this Law in accordance with the provisions of the State Council. When the transition period ends, in accordance with Article 30 of the Draft for Comment, and based on the needs of national economic and social development, the State Council may formulate special preferential policies and report them to the Standing Committee of the National People's Congress for the record before implementation.
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