China Clarifies 2023 VAT Incentives for Small-Scale Taxpayers

The Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly issued an Announcement on Clarifying the Policies on VAT Reduction and Exemption for Small-Scale VAT Payers and Other Policies on January 9, 2023.

The VAT incentives are extensions of previous policies to help vulnerable businesses tide over the challenges posed by the COVID-19 pandemic. Below we explain the latest policies including the VAT exemption policy for small-scale VAT taxpayers and the additional VAT deduction policy for taxpayers in the production and lifestyle services sector in order to make it easier to understand.

• The small-scale taxpayer policies clarify that during the period between January 1, 2023, and December 31, 2023, small-scale taxpayers with monthly sales of under CNY 100,000 yuan shall be exempted from VAT.

That is to say, if the monthly sales of the small-scale taxpayer are under CNY 100,000 yuan, or if the quarterly sales are under CNY 300,000 for small-scale taxpayers who choose one quarter as a tax payment period, the taxpayer will not be subject to VAT.

Certainly, Small-scale taxpayers can choose to waive the VAT exemption incentive and instead issue special VAT invoices for a specific sale. The relief policy is actually for those small-scale taxpayers who issue general invoices for all their sales revenue. If special invoices are issued,  VAT reduction will not apply.

• The small-scale taxpayer policies clarify that during the period 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 that are subject to a 3 percent VAT prepayment rate shall enjoy a reduced prepayment rate of 1 percent.

Previously, during the period from April 1, 2022, to December 31, 2022, small-scale VAT taxpayers that are subject to a VAT levy rate of 3 percent will be exempted from VAT payment or prepayment. In other words, the previous full VAT exemption will no longer apply in 2023. The VAT administration notice clarifies that small-scale taxpayers can choose to waive the VAT reduction incentive and instead issue special VAT invoices for a specific sale.

• The small-scale taxpayer policies also clarify that during the period between January 1, 2023, and December 31, 2023:

1. Taxpayers in the production services industry[1] can enjoy 5% additional VAT deductions based on the deductible input VAT in the current period.
2. Taxpayers in the lifestyle services industry[2] can enjoy 10% additional VAT deductions based on the deductible input VAT in the current period.

The additional VAT deduction is an additional deduction on top of the current input tax that can be deducted. In 2022, the SAT offered a 10% deduction for postal services, telecommunications services, and other current services, however, in 2023, the deduction is reduced to 5%, with a trend of reduction; the SAT offered a 15% deduction for the lifestyle services industry, however, in 2023, the deduction is reduced to 10%. These may be related to the waning and disappearance of the impact of the coronavirus on China.

• In accordance with the provisions of this Announcement, the VAT to be reduced or exempted, which has been paid before the issuance of this Announcement, may be offset against the tax payable by the taxpayer in subsequent tax periods or be refunded.

It is worth noting that taxpayers who have issued VAT invoices to the purchaser should first recover the VAT invoices.

Below we summarize the tax changes brought about by the new policy in the form of a table. (Sales are all inclusive of this number, and the additional VAT deduction applies to VAT taxpayers who can deduct input tax.)

We can see that China has extended most of the VAT incentives offered in 2022, but these incentives will be implemented on a slightly reduced scale in 2023. In particular, enterprises applying small-scale taxpayers should pay attention to the tax differences brought by the convergence of old and new policies, and reduce the tax risks of enterprises through effective means of classification management.

With that being said, 2023 will still be a challenging year for China. It will need to make considerable effort to get its economy back on normal growth track and rebuild business groups’ and foreign investors’ confidence in the country’s economic outlook.

Should you have any further inquiries, please feel free to contact us.

[1] Taxpayers in the production services industry are those who provide “postal services”, “telecommunication services”, “modern services”, and “lifestyle services” account for more than 50% of their total sales.

[2] Taxpayers in lifestyle services refer to those whose sales from ‘lifestyle services’ account for more than 50% of their total sales.