On May 2018, the Government of China introduced a VAT tax cut in China. A Value-Added Tax (VAT) is a neutral tax which makes it possible for the firms to subtract their part paid on business-relevant operations in accordance with their own VAT rate.
The VAT tax cut included lowering the tax from 17% to 16% for manufacturing and other industries. For industries such as telecommunication services, transportation, farm produce and construction, the tax rate was lowered from 11% to 10%. However, the VAT rate for Small Scale Manufacturing Firms remained 3%.
China is a country where taxes are normally high, and this reduction might be good news for some businesses especially foreign investors. We’ve discussed how it can change the game for foreign investors:
Extra investment for businesses
Certain industries are going to be affected big time by this tax cut, like construction, telecommunication, transportation, construction and agricultural firms. These sectors are the backbone of Chinese economy. This tax cut will provide these businesses with finances to reinvest as the cost incurred by public is estimated to be nearly
RMB 240 billion (US$38.13) per year.
Vat Registration Thresholds
To understand it better; industrial tax payers in China are subdivided into three groups —General Taxpayers (GTP), Small Scale Manufacturers and trading companies. The threshold for registration for the GTP was initially almost the same as that for the SMEs i.e. RMB 500,000, which was later raised to RMB 5 million per year turnover. However, the VAT threshold for trading companies remained RMB 800,000.
How the thresholds will benefit foreign investments
You might recall that the VAT tax rate for SMEs was still 3% on all of their outputs, and any small scale manufacturing firm—say, a Foreign Investment startup—will now enjoy a lower tax rate being eligible to pay the VAT tax for an SME.
Although this allowed them to pay a 3% VAT, they were not allowed to claim back their VAT tax or issue a VAT Fapiao—a legal slip that confirms the purchase of goods & services. In this state, if you, being a foreign investor, invest in a startup or a joint venture in China, you are left with two options:
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1.To remain a small scale VAT payer, enjoying the benefits of a lower tax but losing the power to claim VAT credit refund and issue a VAT Fapiao
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2.Remain a GTP, and enjoy the benefits of Vat credit refund and issuing VAT Fapiao
However, the second option is beneficial for those foreign investors who do not have pre-established local network with companies. In that case, most businesses you will deal with will require a VAT Fapiao.
And it's a Wrap!
The government of China is constantly taking measures to increase the inflow of foreign investments for better economic growth.
Figuring out what to do in such circumstances for foreign-owned startups can be difficult, but it doesn’t have to be that way for you! Business China facilitates its clients with
registration and incorporation processes. We also offer premium accounting and company management services. Reach out to us at +86-020-2917 9715 for more details!
