In China, value-added taxpayers are categorized into general taxpayers and small-scale taxpayers based on their annual taxable sales amount. While taxpayers with annual taxable sales exceeding the annual sales ceiling set for small-scale taxpayers must apply for general taxpayer status, newly established businesses and other companies whose annual taxable sales are below the ceiling may voluntarily apply for the status.
Although the VAT rate for small-scale taxpayers is much lower than that for general taxpayers, a general VAT taxpayer status allows companies to save considerable tax payments by deducting input VAT from output VAT. Moreover, only companies with a general VAT taxpayer status are allowed to issue special VAT invoices, a physical tax receipt that can be used as a credit against outstanding VAT liabilities. In practice, many buyers prefer doing business with a seller who has the capability to issue the special VAT invoice, as this special invoice can be used for their own tax deduction purposes.
In this article, we will walk investors through the simplified procedure for general VAT taxpayer status applications, as well as explain how to deal with VAT deduction problems before obtaining the status.
Simplified Application Process after the VAT Reform
In March last year, the State Administration of Taxation (SAT) released new rules for the application of general VAT taxpayer status for implementation on April 1, 2015. Under the revised rules, taxpayers may become a VAT general taxpayer by submitting the tax registration certificate and an application form to the local tax bureau. The tax bureau will then check the tax registration information and finish the registration. Furthermore, along with the “three-in-one” business license reform (i.e., replacing the current tax registration certificate and organization code certificate with a special business license which has a unified social credit code on it), China’s tax bureau has simplified the VAT taxpayer registration process, clarifying that companies will no longer have the “general VAT status chop” stamped on their tax registration certificates/new version of business licenses starting November 2, 2015.
As a result, the time required to obtain general VAT taxpayer recognition has been substantially reduced from the previous 30 working days to around five. Previously, the application procedure also included an interview, an on-site inspection and the submission of a VAT general taxpayer verification form and invoice purchase licenses.
Taxpayers need to note that once they are accredited as a general taxpayer, they can never be converted back to small-scale taxpayers. Additionally, small wholesale companies (i.e., registered capital less than RMB 800,000 and staff less than 10) must pass a three-month probation period under a tax officer’s supervision to become fully certified general taxpayers. During the probation period, an applicant company is also able to purchase invoices from the tax bureau, but this can only be done in limited quantities.
Tax Deduction before Obtaining the Status
Generally, taxpayers are allowed to issue special VAT invoices and deduct input VAT from the next month the day after being certified as a general VAT taxpayer. So how should applicant companies awaiting general VAT taxpayer certification deal with VAT deductions after application?
In August, 2015, the tax bureau released an announcement clarifying tax deduction issues incurred during this period. The announcement stipulated that VAT deduction vouchers obtained during this period may be used for input VAT deduction after the company is accredited with the status, given that the company has not derived any income from manufacturing and business activities and hasn’t declared VAT based on the simplified calculation method.
In cases where VAT deduction vouchers cannot be verified pursuant to the prevailing regulations, the sellers/taxpayers will have to issue a special red-letter VAT invoice first – to reverse the sales and reissue the special VAT invoice afterwards. The Special Letter of the Customs Import VAT Payment obtained by taxpayers may also be used for input VAT deduction upon the verification carried out by the tax bureau.
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