Calculating VAT
For general taxpayers the VAT calculation formula is:
VAT payable = output tax for the current period – input tax for the current period.
The output tax is the sales amount multiplied by the applicable VAT tax rate. For a small-scale taxpayer the VAT calculation formula is simply:
VAT payable = sales amount x VAT rate.
The current period is a period set by the relevant tax authorities. This will often depend upon the location of the taxpayer and the nature of their business. Obviously, for both general and small scale taxpayers it is important to determine what is meant by “sales amount”.
Sales Amount
The sales amount is the amount of the price received by the taxpayer from the buyer plus any “additional fees” received (Article 6 of the VAT Regulation). Undeesr Article 12 of the Detailed Rules, “additional fees” is defined to include such things as commission fees, subsidies, fund raising fees, storage fees, freight loading and unloading fees charged in addition to the price. Under Article 7 of the Regulation, the authorities have the power to vary the sales amount where goods sold or taxable service supplied by a taxpayer is obviously low without a justifiable reason. In such cases, the sales amount will be determined as follows in order of priority:
- If available, the average sale price of similar goods of the taxpayer shall be applied;
- If available, the average sale price of similar of other taxpayers shall apply;
- Otherwise, it shall be determined by using the composite assessable price which is Cost x (1+ cost/profit ratio).
Cost refers to the actual production cost or the procurement cost. The profit ration
VAT Tax Rates
The applicable VAT tax rate for an eligible entity or individual is dependent upon whether the taxpayer is a general taxpayer or a small-scale taxpayer. A small-scale taxpayer is a taxpayer whose annual sales are below a certain level and who do not have sound accounting systems. The thresholds for small-scale taxpayer status are as follows:
- taxpayers engaged in the production of goods or the provision of taxable services whose annual sales amount that is subject to VAT is less than RMB500,000; and
- any other taxpayer whose annual sales amount that is subject to VAT is less than RMB800,000.
All individuals will always be regarded as small-scale taxpayers irrespective of their overall turnover. Small-scale taxpayers that have sound accounting systems can apply to be treated as a general taxpayer.
The tax rate for small-scale taxpayers is 3 per cent of the value of taxable items. For general taxpayers the standard rate of VAT is 17 per cent of the value of the taxable items, although the sale and import of specified goods is taxed at a concessional rate of 13 per cent. It may appear that it is better to be characterized as a small-scale taxpayer as they have a much lower tax rate. However, it will in most cases be preferable to be a general taxpayer. This is because, in the case of general taxpayers, a credit is given for the input tax amount (i.e. the VAT paid previously in the supply chain). The example below demonstrates the benefit of being a general taxpayer in such circumstances.
A further factor is that small-scale taxpayers are not generally entitled to VAT export exemptions and refunds. Accordingly, obtaining general taxpayer status can be extremely important for organizations engaged in export trade in China. The requirements to obtain such status tend to be different depending upon the locality of the company. For example in our experience, Beijing tends to take a more liberal approach to such applications whereas in Guangzhou the process can be quite difficult.
Input Tax
Input tax refers to the VAT paid by sellers of goods, or provider of labour services, in respect of goods and services that are purchased in the “current period”. As can be seen from the VAT calculation formula above, input tax is then credited against the output tax that is levied on the goods for that same “current period”. In order to claim the input tax credit the taxpayer will need to be able to produce a VAT invoice evidencing the input tax that was paid. Where the amount of input VAT creditable is greater than the amount of output VAT charged on sales within a relevant VAT period, the excess amount may be used to offsetbfuture output VAT.
Dear Mattheu,
in case a trading company that imports and sells into China, the VAT calculation:
VAT payable = output tax for the current period – input tax for the current period.
where input tax for the current period includes also the import VAT paid to Customs??
Thanks for your soon reply.
Regards,
Moises.
Moises,
According to the VAT Interim regulations, input VAT presented on the customs-issued import VAT payment report is deductible from output VAT (see article 8(2) of the VAT Interim Regulations).
I hope this helps.
Matthew