China’s New VAT Regulations Are Good News for SMEs

SMEs in China are in for some good news in regards to the new VAT regulations, although it might complicate accounting and administration matters even more than usual. If you’re one of the small-scale taxpayers in China that currently pays 3% VAT, you do not have to pay VAT at all under the new rules that have also suspended the prepayment of VAT.

These new VAT regulations came into place in April 2022 and are part of a long-term policy put in place by the Chinese government and the tax authorities. They aim to create a tax-friendly haven for micro and small-scale businesses.

The huge importance of small businesses cannot be overlooked regarding the cohesion of the Chinese economy. The entire economy has benefitted greatly from the vast growth of micro and small enterprises (MSEs) throughout the past few years. The majority of employees in non- government roles work for MSEs in China, making it an integral part of their success.

It’s believed there are over 44 million MSEs in China across a wide range of business categories that make up around CNY3mn (USD 460,000) annually.

Supporting Small Enterprises in China

It was much easier for larger businesses and enterprises in China to recover after the pandemic due to offsetting the costs on a large scale. The same cannot be said for MSEs. Small enterprises have struggled to survive, so these new VAT regulations add some serious tax relief to help the sector to recover.

VAT exemptions in China can now be applied to all companies that are in the small-scale taxpayer classification bracket that have been paying at the 3% VAT tariff.

The Ministry of Finance (MOF) in tandem with the State Taxation Administration (STA) has also recently stated there will be another positive change to the tax reduction system. Targeting small firms and micro businesses across the board and industries is the main aim of these measures. The MOF has stated that the VAT refunds across China this year are expected to total approximately CNY1.5tn.

What do these VAT Changes Mean for You?

The implications of these new VAT regulations are quite simple in essence. Small businesses at the current 3% VAT rate in China have been eligible for zero VAT since April 2022. But it’s important to remember that normal accounting standards that govern small businesses will still be in place. You will still have to issue a standard tax-exempt invoice that details the zero VAT tariff as and when needed.

The new invoices for VAT exemptions need to be issued from 1 April 2022. Any refunds or sales or discounts after the start of April 2022 that referred to transactions made before that date are still under the previous 3% VAT tax tariff. And because of this change, you need to be very careful when calculating your monthly or quarterly reports in 2022.

The time-consuming and possibly confusing nature of these changes needs to be taken into account, especially if you are a small or medium-sized enterprise that has been fighting cash flow problems while trying to remain competitive and profitable in the marketplace.

These new tax-friendly incentives for small-scale enterprises in China are in place to create a better business environment. Just ensure you have reliable accounting and administration in place to deal with these changes without any billing oversights on your part.