Certain Updates on China VAT Reform
As from 1 July 2017, the 13% VAT rate was abolished in China and the rate for agricultural products, public utilities and cultural products was reduced to 11%. Prior to 1 July 2017, there were four VAT rates in China, namely 17%, 13%, 11% and 6%. A separate rate applies to taxpayers that are subject to the simplified VAT regime. This multiple rate system has created tax disputes and challenges for taxpayers, particularly in determining which VAT rate should be applicable. It has been the Chinese tax authority’s key focus in its VAT reform to streamline the VAT rate brackets and simplify the related tax compliance. The elimination of the 13% VAT rate will mainly affect the following categories of products:
- 1) Agricultural products - including grain/food, edible vegetable oils, feed, chemical fertilizers, etc.;
- 2) Public utilities - including tap water, heating, natural gas, etc.; and
- 3) Cultural products - including books, newspapers, magazines, etc.
The reduction in the VAT rate for agricultural products from 13% to 11% would decrease the deductible input VAT. In view of this, the Chinese tax authority has set out special transitional policy for the processing enterprises, i.e. those enterprises which purchase agricultural products, process them, and sell to customers as products which are subject to VAT at 17%. Under the special transitional policy, the processing enterprises can continue to claim 13% input VAT credit on purchase.
Also, as from 1 July 2017, the verification period for VAT special invoices has been extended from 180 days to 360 days. Under the current VAT rules in China, general VAT taxpayers are required to verify VAT special invoices within 180 days after the invoice issuance date, and declare the input VAT deduction in the month of verification. Failure to comply with the 180-day deadline would result in the disallowance on an input VAT deduction. The extension of the deadline should be welcomed by taxpayers.