21 June, 2018
On April 4, 2018, China issued two new circulars related to VAT change, i.e. Circulars Caishui [2018] No. 32 and No. 33, (hereinafter “Circular 32” and “Circular 33”) which are both effective from May 1, 2018. These two circulars are about the VAT rate deductions and changes to the annual sales thresholds for small-scale VAT payers.
1. VAT rate changes
Main Changes in Circular 32
Part of taxable activities that are currently subject to 17% will be subject to 16%, mainly including sales and importation of general goods, provision of processing, repair and replacement services and provision of leasing services of tangible and moveable assets. However, the production activities remain taxable at the rate of 17%.
Part of taxable activities that are currently subject to 11% will be subject to 10%, mainly including sales and importation of specified goods, provision of transportation, postal, basic telecom services, construction services and leasing services of immoveable property and sales of land use right or immovable property.
2. Changes to VAT registration thresholds
Main Changes in Circular 32
Based on current regulations, there are three thresholds for determination of small-scale VAT payers:
- Taxpayers engaged in the production of goods or in the provision of repair, replacement and processing services whose annual taxable sales value is less than RMB 500,000;
- Taxpayers engaged in the wholesaling or retailing of goods, whose annual taxable sales value is less than RMB 800,000;
- Taxpayers engaged in the provision of taxable activities under VAT reform, such as transportation, postal or certain modern services, consulting services, etc., whose annual taxable sales value is less than RMB 5 million.
Circular 33 changes the three thresholds into one threshold, i.e. RMB 5 million for all small-scale VAT payers. Small-scale VAT payers are subject to a unified VAT rate of 3% without deducting the input VAT like general VAT payers.
In addition, Circular 33 also stipulates that a manufacturing or trading enterprise which is VAT general taxpayer based on the previous threshold may convert to small-scale VAT payer status by December 1, 2018 if the annual sales of enterprise have not reached the new threshold of RMB 5 million. However, under this arrangement, any uncredited input VAT before the conversion date no longer will be creditable.
Considering the above, the enterprises which are general VAT payers need to supervise whether their supplier will change to small-scale VAT payer, as this will impact the VAT special invoice and input VAT deduction. In fact, instead of issuing a 17% VAT special invoice allowing input VAT deduction, the latter will issue an ordinary invoice at the rate of 3% with no deduction allowed.
For further information, please contact:
Olivier Monange, Partner, DS Avocats
monange@dsavocats.com
