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Value Added Tax (VAT) in China

By: EconomyWatch Date: 30 June 2010

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Value Added Tax (VAT) was implemented in China in 1984. Initially, the tax was levied on 24 specified items. The need for constructing a socialist market economy system in China resulted in the proclamation of 'The Provisional Regulation of the People's Republic of China on Value Added Tax' on January 1, 1994.

Value Added Tax in China is one of the important sources of fiscal revenues for the government, especially the central government. The implementation of VAT is done by the State Administration of Taxation while the customs collects the import VAT.

The revenue earned from VAT is divided between the central (75%) and local government (25%).

The list of VAT taxable items and the rates in China can be understood from the following:

Coverage of Collection

Rate

Exportation of goods

Edible vegetable and grain duplicates

Agriculture, forestry, aquatic products, products of animal husbandry

Book, magazines, newspapers

Tap water, cooling, heating, hot air supplying, gas, hot water, natural gas, liquefied petroleum gas, coal/charcoal products for household use

Selected non-metal mineral products, Selected metal mineral products, coal

Chemical fertilizers, feeds, agricultural machinery, agricultural chemicals, plastic converting film for farming

13%

Crude oil, mine salt and other goods and services not listed above

17%

VAT in China is payable by individuals as well as enterprises who are associated with selling merchandise, providing services related to processing, repairing and assembling and import of goods. VAT Taxpayers in China are categorized into two sections, normal taxpayer and small taxpayer, depending on the turnover of the goods and services on sale and the accounting system condition.

The amount of VAT payable by the normal taxpayer can be calculated by the following:

Output tax payable for the current period – Input tax payable for the current period = Tax payable

The amount of VAT payable by the small taxpayer is as follows:

Sales amount x Applicable rate = Tax payable

(The applicable rate is 4% for commercial sectors and 6% for others)

Certain items and services are exempted from VAT. These include the following:

• Instruments and equipment imported for direct use in scientific research, experiment and education

• the agricultural production materials as ruled, the self-produced primary agricultural products sold by Agricultural producing units and individuals

• Imported materials and equipment granted, gifted by foreign governments or international organizations

• Contraceptive medicines and devices

• Articles imported directly by organizations for the disabled for exclusive use by the disabled

• Materials imported directly to support the poverty relief and charity cause donated freely by overseas natural persons, legal persons and other organizations

• The taxable services provided by individual disabled laborers

• Antique books purchased from the public

Certain reforms have been implemented in particular areas of China in 2004 with regard to the VAT.