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China exempts small businesses and some service industries from VAT in 2023

China will exempt small businesses with monthly sales of 100,000 yuan (about US$14,790) or less, as well as taxpayers in specific industries such as lifestyle services, from value-added tax (VAT) throughout 2023, according to finance and taxation authorities.

The Ministry of Finance (MOF) and State Taxation Administration (STA) also specified tax relief policies for taxpayers engaged in postal and telecom services.

The VAT incentives are meant to help vulnerable businesses overcome the difficulties of the Covid-19 pandemic and represent an extension of previous policies. A wide range of tax incentives and cuts have been taken place in China in the past few years to encourage and support economic growth.

In 2022, the country implemented record-high value-added tax credit refunds, which totaled about 2.4 trillion yuan.

The VAT exemption and reduction policies will be valid from January 1, 2023, to December 31, 2023.

If a small business has monthly sales under RMB 100,000 (approx. US$14,740), or if the quarterly sales are under RMB 300,000 (approx. US$44,220) for taxpayers who choose one quarter as a tax payment period, the taxpayer will not be subject to VAT.

This represents a lower threshold than in 2021 and 2022. During the period from April 1, 2021, to December 31, 2022, the VAT limit for small-scale taxpayers was RMB 150,000 (approx. US$22,110) per month (or RMB 450,000 per quarter, approx. US$66,300).

The VAT administration notice clarifies that small-scale taxpayers with total monthly sales of over RMB 100,000, but whose sales when excluding real estate sales occurring in the current period is less than RMB 100,000, will be exempt from paying VAT on the sale of goods, labor services, services, and intangible assets.

Small businesses can choose to waive the VAT exemption incentive and instead issue special VAT invoices for a specific sale.

Between January 1, 2023, and December 31, 2023, small-scale taxpayers that are subject to a VAT levy rate of 3 percent can enjoy a reduced levy rate of 1 percent. The VAT items subject to a 3 percent VAT prepayment rate shall enjoy a reduced prepayment rate of 1 percent.

In 2022, small-scale VAT taxpayers subject to a VAT levy rate of 3 percent were exempted from VAT payment or prepayment.

The VAT administration notice explains that small businesses can opt to waive the VAT reduction incentive and instead issue special VAT invoices for a specific sale.

An additional VAT deduction policy was issued for lifestyle and production-oriented services in 2023. Taxpayers in these sectors can enjoy 5 percent additional VAT deductions based on the deductible input VAT in the current period.

Taxpayers in the lifestyle services can enjoy 10 percent additional VAT deductions based on the deductible input VAT in the current period.

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Production-oriented services include ‘postal services’, ‘telecommunication services’, ‘modern services’, and ‘lifestyle services’. Taxpayers in these sectors must have sales from ‘lifestyle services’ that represent more than 50 percent of their total sales.

Previously, taxpayers in the postal, telecommunications, modern services, and lifestyle services industries were granted a 10 percent additional VAT deduction based on the deductible input VAT between April 1, 2019, and December 31, 2021, and taxpayers in lifestyle services enjoyed a 15 percent additional VAT deduction from October 1, 2019, to December 31, 2021.

Tax authorities in China extended this additional VAT deduction policy to December 31, 2022.

In recent years, a key aspect of China’s new tax rules and policy directions has been tax incentives and cuts to boost the economy and encourage investment and research and development activities. At the same time, China is also making efforts to improve its tax administration environment, in particular the administration of transfer pricing issues relating to multinational enterprises.

The strict Covid-19 prevention measures imposed under China’s “Zero-Covid” policy, significantly affected businesses and the economy in general. However, since the government decided to lift restrictions and quarantines, experts have raised their forecasts for China’s real GDP growth to 5.2 percent in 2023 (from 4.7 percent).

Adapting to a new reality, and a possible surge in Covid cases will be challenging for China. The government will have to consider creative ways to get the country’s economy back on track and rebuild businesses and investors’ confidence.

According to analysts, China may decide to extend most of the tax incentives that it has offered in the past, at least until the end of 2023.

With respect to tax audits, there has been a comparatively calmer tax audit environment in the past three years. However, China will continue to focus on improving its tax enforcement.

Tax authorities may become more aggressive in their enforcement activities in the future, to plug the gap in tax revenue collection created by a slower economy and to make up for the reduction in tax revenue arising from various tax cut measures.


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