China has decided to further expand the additional value-added tax (VAT) deduction policy for the production and life service sector to help service sector enterprises survive the pandemic . No specific expiration date is provided. Previously, the policy of additional deduction of VAT in the production and life services sector was extended for one year until December 31, 2022. Eligible companies can continue to benefit from an additional deduction of 10 % or 15% of the input VAT creditable during the current period. the amount of tax to be paid. This will reduce the financial burden on small businesses in the country and stimulate job creation.
On July 29, 2022, Premier Li Keqiang chaired a State Council executive meeting and decided to adopt a series of measures to further strengthen demand, promote efficient investment and stimulate consumption. Among other things, he reaffirmed that China “will fully extend the additional VAT deduction for services”. Analysts believe this is a sign that the additional VAT deduction policy will be further extended.
Originally scheduled to expire on December 21, 2021, the Additional VAT Deduction is a preferential tax policy granted to qualifying production and life services under which their input VAT for the current period could be deducted from their amount parabola of VAT on a weighted basis.
Earlier this year in March, China had extended this additional VAT deduction policy until December 31, 2022, according to an announcement issued by the Ministry of Finance (MOF) and the State Administration of Taxation (STA). .
Now, with the statement issued after the July 29 State Council executive meeting, it is very likely that companies engaged in production services and life services can continue to benefit from the additional 10% VAT deductions. and 15%, respectively, beyond December 31, 2022.
What is the initial additional VAT deduction policy?
In March 2019, the MOF, STA, and General Administration of Customs (GAC) jointly issued an announcement, which provided that between April 1, 2019 and December 31, 2021, taxpayers in the postal, telecommunications, modern and living services will be eligible for an additional 10% VAT deduction based on the input VAT deductible during the current period.
In September 2019, MOF and STA further announced that from October 1, 2019 to December 31, 2021, the additional VAT deductions available to taxpayers in the life service industry will increase from 10% to 15% depending on the current input VAT deductible period.
To be eligible for these additional deductions, the taxpayer’s business must fall within the scope of “postal services”, “telecommunications services”, “modern services” and “life services” and must reach a required percentage of business activity.
1) Meet the 50% sales requirement
As a general rule, the company’s sales in the relevant service sector must represent more than 50% of total sales.
For postal services, telecommunication services and modern services, the turnover of companies created after April 1, 2019 will be calculated on the basis of the first three months from the date of creation.
For life services, sales for businesses established after October 1, 2019 will be calculated based on the first three months from the date of establishment.
Once a taxpayer is determined to be eligible for the Supplemental VAT Deduction Policy, no adjustments will be made in the current year, and their eligibility in subsequent years should be determined based on their sales for the year. former.
The amount of additional VAT deduction that a taxpayer is eligible for but has not yet done so can be deducted together at the time they are determined to apply the additional VAT deduction policy.
2) Business scope in life service industry
The specific scope of the four services should be determined in accordance with the notes on the sale of services, intangible assets and real estate (Cai Shui  No. 36).
Accordingly, the Services are defined to include the following:
- Postal services: Mail delivery, postal delivery, confidential communication, issue of stamps and distribution of newspapers.
- Telecommunication services: Voice call services, SMS, MMS or other services requiring the transmission, reception or application of electronic data and information using fixed network resources.
- Modern services: Research and development, information technology services, cultural and creative services, certification and consulting services, business support services, and radio, film and television services.
- Life benefits: Cultural and sporting services, logistics and ancillary services, business certification, consultancy and support services, education and health services, travel and entertainment services and other services considered to be part of the life.
3) Being a general VAT taxpayer
Since only general VAT taxpayers can deduct input VAT from output VAT when calculating the VAT payable, the underlying eligibility to benefit from the additional VAT deduction policy is that the company must be registered as a general VAT taxpayer.
For newly established service companies, they can apply the additional VAT deduction policy from the date they are registered as a general taxpayer – if their three-month sales from the date of incorporation meet the eligibility criteria
Calculation of additional VAT deductions
The new deductions will affect the input VAT credits calculated in the current period, therefore:
The additional input VAT credit accrued for the current period is:
Note: Whether the additional 10% or 15% deduction applies, depends on the type of service rendered to the taxpayer.
Taxpayers shall, after calculating the amount of tax due under the general method of taxation according to the applicable provisions (hereinafter referred to as “tax amount before deduction”), make additional deductions of VAT as follows:
- If the amount of pre-deduction tax payable is zero, the entire amount of additional deduction deductible from the current period must be carried forward to the next deduction period;
- If the pre-deduction tax amount payable is a positive number and greater than the deductible additional VAT deduction amount for the current period, then all of the deductible additional VAT deduction amount for the current period must be deducted from the amount of tax before deduction payable; Where
- If the pre-deduction tax amount payable is a positive number and less than or equal to the deductible additional VAT deduction amount for the current period, the deductible additional VAT deduction amount for the current period must be deducted from the amount of tax payable, until the balance of the amount of tax payable is nil and the balance of the amount of the additional deduction of deductible VAT of the current period can be carried forward to the following period for a continuous deduction.
Note that the additional VAT deduction policy is not applicable to the export of goods and labor services or cross-border taxable activities carried out by a taxpayer.
Taxpayers are required to separately calculate changes in the provision, deduction, decrease and balance of the amount of additional VAT deduction.
How to register?
If taxpayers meet the eligibility requirements for the VAT supplemental deduction policy, they can continue to submit the supplemental deduction policy application statement or the 15% supplemental deduction policy application statement. through the electronic tax office or go to the tax office. office in person.
Businesses are advised to seek local professional assistance to comply with the new standards and benefit from greater tax reductions.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors in China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen and Hong Kong. Please contact the company for assistance in China at [email protected] Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, USA, Germany, Italy, India and Russia, in addition to our business research facilities along the Belt & Road Initiative . We also have partner companies helping foreign investors in the Philippines, Malaysia, Thailand and Bangladesh.