China Clarifies 2023 VAT Incentives for Small-Scale Taxpayers and Lifestyle and Production Oriented Services
China’s finance and tax authorities have announced the 2023 VAT incentives for a range of market entities, including small-scale taxpayers and taxpayers in production and lifestyle service industries. The VAT incentives are extensions of previous policies to help vulnerable businesses tide over the challenges posed by the COVID-19 pandemic. Below we explain the latest policies and discuss what the changes may signal for China’s economy in 2023.
UPDATE (August 14, 2023): On August 2, 2023, China’s Ministry of Finance and State Taxation Administration jointly released multiple announcements, extending the preferential tax policies for small businesses to the end of 2027, which include the value-added tax exemptions and reductions for small-scale taxpayers.
On January 9, 2023, China’s Ministry of Finance (MOF) and the State Taxation Administration (STA) jointly issued an announcement to clarify some of its value-added tax (VAT) incentives for 2023, including the VAT exemption policy for small-scale VAT taxpayers and the additional VAT deduction policy for taxpayers in the production and lifestyle services sector.
The Announcement on Clarifying VAT Exemption and Other Policies for Small-Scale VAT Taxpayers [MOF STA Announcement  No.1] (hereinafter the “small-scale taxpayer policies”) will be applied during the period between January 1, 2023, and December 31, 2023. (Editor’s note: As per the August 2 update, the VAT exemption and reduction policy for small-scale taxpayers will be valid until December 31, 2027.)
Together with the small-scale taxpayer policies, the STA also released the Notice on Matters related to the Collection and Administration of VAT Reduction and Exemption Policies for Small-Scale VAT Taxpayers [STA Announcement  No.1] (hereinafter the “VAT administration notice”, clarifying the detailed rules of VAT collection and administration.
In this article, we introduce China’s latest VAT incentives for relevant taxpayers in 2023 and compare them with previous policies.
VAT exemption for small-scale taxpayers in 2023
The small-scale taxpayer policies clarify that during the period between January 1, 2023, and December 31, 2023, small-scale taxpayers with monthly sales of under RMB 100,000 (approx. US$14,740) shall be exempted from VAT.
Now, according to the most recent MOF STA Announcement  No.19, this VAT exemption policy will be effective until December 31, 2027.
That is to say if the monthly sales of the small-scale taxpayer are under RMB 100,000 (approx. US$14,740), or if the quarterly sales are under RMB 300,000 (approx. US$44,220) for small-scale taxpayers who choose one quarter as a tax payment period, the taxpayer will not be subject to VAT.
This threshold is a bit lower than that in 2021 and 2022. During the period from April 1, 2021, to December 31, 2022, the VAT threshold for small-scale taxpayers was RMB 150,000 (approx. US$22,110) per month (or RMB 450,000 per quarter, approx. US$66,300).
|VAT Liability Threshold for Small-Scale Taxpayers, 2021 to 2023|
|Monthly sales||Quarterly sales||Effective period|
|RMB 100,000||RMB 300,000||January 1, 2021, to March 31, 2021|
|RMB 150,000||RMB 450,000||April 1, 2021, to December 31, 2022|
|RMB 100,000||RMB 300,000||January 1, 2023, to December 31, 2023|
Meanwhile, 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, labor services, services, and intangible assets.
Small-scale taxpayers can choose to waive the VAT exemption incentive and instead issue special VAT invoices for a specific sale.
VAT reduction for small-scale taxpayers in 2023
The small-scale taxpayer policies clarify that during the period between January 1, 2023, and December 31, 2023, small-scale taxpayers that are subject to a VAT levy rate of 3 percent can enjoy a reduced levy rate of 1 percent. The VAT items that are subject to a 3 percent VAT prepayment rate shall enjoy a reduced prepayment rate of 1 percent.
Previously, during the period from April 1, 2022, to December 31, 2022, small-scale VAT taxpayers that are subject to a VAT levy rate of 3 percent will be exempted from VAT payment or prepayment.
The VAT administration notice clarifies that small-scale taxpayers can choose to waive the VAT reduction incentive and instead issue special VAT invoices for a specific sale.
Now, according to the most recent MOF STA Announcement  No.19, this VAT reduction policy will be effective until December 31, 2027.
Additional VAT deduction policy for lifestyle and production-oriented services in 2023
The small-scale taxpayer policies also clarify that during the period between January 1, 2023, and December 31, 2023:
- Taxpayers in the production-oriented services industry can enjoy 5 percent additional VAT deductions based on the deductible input VAT in the current period.
- Taxpayers in the lifestyle services industry can enjoy 10 percent additional VAT deductions based on the deductible input VAT in the current period.
Taxpayers in production-oriented services refer to those whose sales from ‘postal services’, ‘telecommunication services’, ‘modern services’, and ‘lifestyle services’ (‘four services’) account for more than 50 percent of their total sales. The specific scope of the four services should be determined according to the Notice on the Sale of Services, Intangible Assets, and Immovable Property [Cai Shui  No. 36].
Taxpayers in lifestyle services refer to those whose sales from ‘lifestyle services’ account for more than 50 percent of their total sales.
Originally, taxpayers in the postal, telecommunications, modern services, and lifestyle services industries enjoyed a 10 percent additional VAT deduction based on the deductible input VAT in the current period from April 1, 2019, to December 31, 2021, and taxpayers in lifestyle services enjoyed a 15 percent additional VAT deduction from October 1, 2019, to December 31, 2021.
In March 2022, China extended this additional VAT deduction policy to December 31, 2022, according to an announcement released by the MOF and STA.
Then on July 29, 2022, Premier Li Keqiang chaired an executive meeting of the State Council and decided to adopt a host of measures to further bolster demand, promote effective investment, and boost consumption. Among others, it reinstated that China will “fully extend the additional VAT deduction for services”.
Now, this promise was translated into concrete policies, though the additional deduction percentage is a bit lower than that in the original policies.
|Additional VAT Deduction Policy, 2019 to 2023|
|Taxpayers in lifestyle services||10 percent (April 1, 2019, to September 30, 2019)
15 percent (October 1, 2019, to December 31, 2022)
|10 percent (January 1, 2023, to December 31, 2023)|
|Taxpayers in production-oriented services||10 percent (April 1, 2019, to December 31, 2022)||5 percent (January 1, 2023, to December 31, 2023)|
How to understand the 2023 VAT incentives
From the information introduced above, we can see that China has extended most of the VAT incentives offered in 2022, but these incentives will be implemented on a slightly reduced scale in 2023.
This is in line with the economic situation and policy development in China—in 2022, businesses in China were struggling with strict COVID-19 control and prevention measures under China’s “Zero-COVID” policy. Now, with China officially removing centralized quarantine for inbound travelers, resuming visas and passport issuance, and optimizing most of its COVID-19 control and prevention measures, analysts have raised their forecasts for China’s real GDP growth to 5.2 percent in 2023 (from 4.7 percent).
That said, 2023 will still be a challenging year for China. It will need to make considerable effort to get its economy back on the normal growth track and rebuild business groups’ and foreign investors’ confidence in the country’s economic outlook.
We anticipate that China will extend most of the tax incentives that it has offered in the past few years, or at the very least, that it will not suddenly withdraw the preferential policies in 2023.
(This article was first published in January 2023 and was last updated on August 14, 2023.)
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