China business tax: can input value added tax credits improve business cash flow?

Value-added tax (VAT) is an indirect tax applied to the sale of goods and provision of services. In 2016, all sectors of the People’s Republic of China were unified into the government VAT system, while various VAT rates were implemented on a sector by sector basis.

VAT unification stands to decrease the payable VAT and improve cash flow for registered taxpayers. Specifically, for entities registered as VAT general taxpayers (taxpayers), the application of VAT to all sale of goods and provision of services consumed in the territory of PRC enables more input VAT credits to be claimed as input tax and offset against output tax.

Ultimately, VAT is carried forward to relieve the tax burden for enterprises while reducing costs in tax collection and administration. Therefore, understanding the role of input VAT credits in payable VAT is essential in improving cash flow management.

Case study

In the instance where a business taxpayer provides translation services, the VAT payable on the translation fee of a document may be calculated according to the following:

  • Current VAT payable = current output tax – input tax of the current period

  • The translation fee is RMB 2,000, while RMB 120 RMB is applied as the 6% VAT

  • The output VAT is RMB 120 RMB because it is the VAT amount received from the provision of services is the output tax

  • The total amount of VAT borne from the purchase of goods or provision of services to provide such translation fee is RMB 120

  • The RMB 120 VAT is eligible to be claimed as an input VAT credit to offset the output VAT

  • The current VAT payable is RMB 0 as RMB 120 (current output tax) – RMB 120 (input tax of the current period)

Recent legislation changes to input VAT credits

On 21 March 2019, the Ministry of Finance, State Taxation Administration and General Administration of Customs jointly issued its Circular on Relevant Policies for Deepening VAT Reform (Circular 39). Circular 39, effective from 1 April 2019, deepens the optimization of input VAT credits to relieve tax burdens for taxpayers. Below we outline the primary changes which could greatly affect your VAT calculations.

Input VAT credit for the purchase of domestic passenger transportation
VAT accrued on the purchase of domestic passenger transportation can be claimed as input VAT credits. Taxpayers who cannot obtain a special VAT invoice may use the following supporting items to calculate the input VAT credits:

  • Electronic general VAT invoice
  • E-ticket itinerary receipt for air transportation
  • Railway ticket
  • Other tickets for road, waterway and other transportation 

It is important to note that all passenger tickets require the passenger details and specific VAT calculations apply to each leg of transportation.

Additional 10% input VAT credit
From 1 April 2019 to 31 December 2021, taxpayers of manufacturing and living service industries are permitted an additional 10% input credit against payable VAT (referred as additional deduction policy). The additional deduction policy only applies to qualified taxpayers where 50% of the sales volume is generated by postal, telecommunication, modern and consumer services in the prior year April 2018 to March 2019, or for taxpayers established after 1 April 2019 the first 3 months after the date of establishment. 

Excess input VAT refunds
Generally, where the input VAT amount for the April 2108 -March 2019 period was more than the output VAT amount for the period, the excessive input VAT amount was required to be carried forward to the next period. Only, selective sectors were permitted to claim a refund on the excess input VAT. Therefore, for a taxpayer with a large number of purchases and low sales revenues could discover a large number of non-refunded input VAT credits occupying the cash flow for a length of time. The Notice on the Refund of the Input VAT Credit Balance for Certain Industries in 2018 permitted entities within a list of 18 sectors to claim a refund on input VAT credit refunds. In the Circular 39, all taxpayers who meet the following criteria may apply for the refund of the incremental excess input VAT.

  • As of the taxation period ending April 2019, the incremental VAT credit is more than zero for six consecutive months (two consecutive quarters) and the sixth month’s incremental VAT credit exceeds more than RMB 500,000
  • The taxpayer’s tax rating is Grade A or B
  • 36 months prior to the application, no illegal offences on VAT credit rebates, export VAT rebates or special VAT invoices were committed
  • 36 months prior to the application, no tax evasion penalty was imposed twice or more by the tax authority
  • From 1 April, the entity has not enjoyed preferential policies for VAT refunds upon collection and tax refund after collection

Optimising input VAT credit could enable considerable savings for business taxpayers and efficient cash flow management. With the latest VAT effective from 1 April 2019, companies in China should implement the appropriate accountancy measures to enjoy such benefits. Failure to adopt the correct measures could result in significant losses for your company, therefore it is essential to revisit your management of VAT invoices.

If you have concerns related to input VAT credits, please contact Horizons at talktous@horizons-advisory to schedule a consultation session. From RMB 1,500 per session, Horizons can provide insight, expertise and the right solutions for you. 

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