March 2023
Yanting Pei and Teresa Huang
On January 9, 2023, the Ministry of Finance and the State Taxation Administration issued Announcement No. 1 [2023], i.e., the Announcement on Clarifying the Value-Added Tax Reduction and Exemption Policies for Small-Scale Value-Added Tax Taxpayers and Other Policies (hereinafter referred to as “Announcement No. 1”), and at the same time issued the Announcement of the State Taxation Administration on Tax Collection Administration Matters Concerning Value-Added Tax Reduction and Exemption Policies for Small-Scale Value-Added Tax Taxpayers and Other Policies (hereinafter referred to as “Announcement on Tax Collection Administration”), which adjusted the policies on VAT reduction and exemption for small-scale VAT taxpayers. Such policy mainly covers several aspects such as tax-exempt sales amount, preferential tax rate and additional deduction, which are slightly adjusted compared with the policy in 2022, specifically as follows:
1. Main Changes
| Year | 2022 | 2023 | |
| Tax-exempt Sales Amount | Monthly sales amount of RMB150,000 or less[1] | Monthly sales amount of RMB100,000 or less | |
| Preferential Tax Rate | A small-scale VAT taxpayer’s taxable sales revenue to which the VAT rate of 3% applies shall be exempt from VAT; and the VAT on its items subject to prepayment of VAT at the rate of 3% shall be suspended from prepayment.[2] | A small-scale VAT taxpayer’s taxable sales revenue to which the VAT rate of 3% applies shall be subject to VAT at the reduced rate of 1%; and the VAT on its items subject to prepayment of VAT at the rate of 3% shall be prepaid at the reduced rate of 1%. | |
| Additional Deduction | Taxpayers in the producer services industries | 10% of input tax may be deducted[3] | 5% of input tax may be deducted |
| Taxpayers in the consumer services industries | 15% of input tax may be deducted[4] | 10% of input tax may be deducted | |
2. Calculation of Sales Amount
According to the Announcement on Tax Collection Administration, sales amount means the sales amount obtained by the taxpayer from selling goods, labor services, services, and intangible assets, excluding sales amount from selling any immovable property. However, for sales of immovable property only, entities and individual industrial and commercial households in small-scale VAT taxpayers shall determine whether to prepay VAT according to their tax periods, Article 9 of the Announcement on Tax Collection Administration and other current policies; other individuals selling any immovable property shall continue to be exempted from VAT in accordance with the current provisions.
Secondly, as for the situation where VAT is collected based on the difference between cost and proceeds, the residual amount, which is resulted by deducting relevant costs, shall be treated as the taxable sales amount.
In addition, as far as the rental income received by a natural person from leasing any real estate is concerned, the amount of reduction and exemption is also adjusted in accordance with this adjustment of the reduction and exemption for small-scale taxpayers under Article 9 of the Detailed Rules for the Implementation of the Interim Regulation of the People’s Republic of China on Value-Added Tax, which means that, where the monthly rental income after apportionment does not exceed RMB100,000, he/she shall be exempt from VAT.
3. Traceability of Transactions That Have Occurred
According to Announcement No. 1, any VAT of a taxpayer that should be reduced or exempted and has been collected before the issuance of the Announcement may be offset against the tax payable of the taxpayer in subsequent tax periods or be refunded. However, according to the Announcement on Tax Collection Administration and the FAQs on Three New VAT Policies Issued in 2023 issued by the Goods and Services Tax Department of the State Administration of Taxation, the following situations should be distinguished:
1). Where a VAT invoice has been issued before 31 December 2022 and a red-letter invoice is required to be issued in the event of a discount sales, sales return or an invoicing error:
The red-letter invoice shall still be issued at the original applicable tax rate (if the taxpayer makes an error in invoicing and needs to reissue a new invoice, the correct blue-letter invoice shall be reissued after the red-letter invoice is issued).
2). Where a VAT-exempt invoice has been issued after January 1, 2023 and before the issuance of Announcement No. 1:
The VAT-exempt invoice is not required to be recovered, and the VAT shall be collected at a reduced rate of 1% when filing the tax return
3). Where a plain VAT invoice has been issued at a rate of 3% after January 1, 2023 and before the issuance of the Announcement No. 1 and the VAT has been paid:
The plain VAT invoice is not required to be recovered, and the VAT may be offset or refunded in future tax periods.
4). Where a special VAT invoice has been issued at a rate of 3% after January 1, 2023 and before the issuance of the Announcement No. 1, but the tax return has not yet been filed:
After all copies of the VAT invoice have been recovered and invalidated or a special red-letter VAT invoice has been issued in accordance with the relevant provisions, the taxpayer may enjoy the tax reduction and exemption policy.
4. Remaining Additional Deductions from Previous Years
Any unused deductions from previous years may be used to offset against the taxable amount during the validity period of the additional deduction policies. In other words, although the proportion of the accrued additional deductions has been adjusted in the current year, it does not affect the amount already accrued, and the accrued and unused deductions may continue to be used to offset against the taxable amount during the validity period of the Announcement No. 87 [2019] of the Ministry of Finance and the State Taxation Administration and the Announcement No. 39 [2019] of the Ministry of Finance, the State Taxation Administration and the General Administration of Customs, and this Announcement No. 1 only affects the amount of accrued additional deductions in the current period and does not affect the balance of the additional deductions unused at the end of the previous period.
In general, the policy announced this time has reduced the strength of some of the preferences compared to the policies before 2023. However, the new policy allows small-scale VAT taxpayers to choose to file tax returns on a monthly or quarterly basis, and to choose to waive the tax exemption on a per-occasion basis, which actually provides more flexibility for taxpayers’ tax planning. Enterprises may, taking into account their own business operations, choose an appropriate taxpayer status and tax filing period to achieve the purpose of enjoying the tax preferences.
[1]. Announcement of the Ministry of Finance and the State Taxation Administration on Clarifying the Policy for Exempting Small-Scale Value-Added Tax Taxpayers from Value-added Tax (Announcement No. 11 [2021] of the Ministry of Finance and the State Taxation Administration)
[2]. Announcement of the Ministry of Finance and the State Taxation Administration on Exempting Small-Scale Value-Added Tax Taxpayers from Value-Added Tax (Announcement No. 15 [2022] of the Ministry of Finance and the State Taxation Administration)
[3]. Announcement of the Ministry of Finance, the State Taxation Administration and the General Administration of Customs on Relevant Policies for Deepening the Value-Added Tax Reform (Announcement No. 39 [2019] of the Ministry of Finance, the State Taxation Administration and the General Administration of Customs)
[4]. Announcement of the Ministry of Finance and the State Taxation Administration on Clarifying the Additional Value-Added Tax Credit Policy for the Consumer Services Industries (Announcement No. 87 [2019] of the Ministry of Finance and the State Taxation Administration)
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