All companies in China need to pay Value-Added Tax ( “VAT” ) based on their revenue. Similar to GST, VAT is a direct tax levied on sales transactions. According to related taxation laws of China, VAT taxpayers are categorized into general taxpayers and small-scale taxpayers based on their annual taxable sales.
Small Scale Tax Payer
Normally, any company newly registered in China will be regarded by the Chinese tax bureau as a small-scale tax payer. Small scale taxpayers are subject to lower uniform VAT rate of 3 percent, ( the rate was reduced to 1% in the post coronavirus outbreak period). However small scale tax payer cannot credit input VAT from output VAT, nor are they entitled to VAT export exemptions and refunds.
Small scale taxpayers have annual sales revenue smaller than RMB 5 million ($720,000). Small scale taxpayers can only issue ordinary invoices;(Fapiao) If they need to issue VAT special invoices, they will have to go to the tax bureau and pay for the additional tax at front, tax bureau will then issue the special VAT invoices on their behalf. Small scale pays tax every quarter.
General Tax Payer
Companies must fulfill certain requirements to be eligible for VAT general taxpayer status and undergo the application process to acquire the designation. Most importantly companies must have annual sales figure greater than RMB 5 million. Other soft requirements are also taken into consideration in the application process such as business model, registered capital, office size, and number of employees.
For general tax payers, there are different VAT rates for different industries which are:
- 13%- for companies selling or importing general goods, and providing repairing services
- 6%- for companies providing general services such as consulting, financial, IT, training, and other daily services
- 9%- for companies that are in real estate industry, or providing construction, transportation, postal services and other special services.
General taxpayers can credit input VAT from output VAT, and they are entitled to VAT export exemptions and refunds. General tax payers have to pay tax monthly and they can issue ordinary invoices or VAT special invoice on their own.
VAT general taxpayer registration
To obtain general taxpayer status, taxpayers are required to go through a registration process. VAT general taxpayer registration happens at the very end of the corporate establishment process, after the business license, and corporate bank accounts are ready.
The general VAT taxpayer status will be effective from the same day the registration is completed, however to complete the VAT system setup, companies still need to purchase special printers and blank invoices for fapiao and to send a representative employee to participate in mandatory training at the tax bureau.
To prevent VAT invoice fraud, tax bureau firstly only gives a few blank invoices to companies such as 10 invoices per month with a limited invoice amount of RMB 10,000 on each invoice. If companies need to issue more invoices with a larger amount to facilitate the sales, they need to bring business proof and apply for additional blank invoices.
How to choose
Companies whose annual sales are below the RMB 5 million ceiling as well as those who have newly established their business can voluntarily apply for general taxpayer recognition. Then the question comes, should your company be a general tax payer or a small scale tax payer?
If your customers in China need VAT special invoices and your suppliers or service providers can provide you with VAT special invoices, it’s better to be an general tax payer to enjoy the VAT credit system.
If your customers in China don’t need VAT special invoices, or you don’t have many direct customers in China running the company as a customer relationship office or a quality control office for the headquarter, then you should choose to be a small scale tax payer.
If you direct export goods and products from China, you need to be a general taxpayer to be able to enjoy VAT export exemption and refund.