In China, turnover tax refers to a group of taxes levied on the sales of goods and services by businesses. These taxes are designed to be simple and efficient to administer and are generally based on the total value of the goods or services sold by a business. Essentially, turnover tax is applied to businesses engaged in selling goods or services and is designed to be a simple and efficient way of collecting tax revenue. Businesses operating in China need to be aware of their tax obligations and comply with the regulations in order to avoid penalties and fines.
China’s turnover tax system consists of value-added tax (VAT) and consumption tax, which are indirect taxes levied on businesses to produce and distribute goods and services. Fapiao is an invoice for businesses to claim input tax credits, which must be issued for every sale made. It is important to ensure compliance and prevent tax evasion in the turnover tax system in China. This article provides extensive guidance about the turnover tax system in China, including VAT, consumption tax, and the use of fapiao to ensure compliance.
The Chinese Tax System
First, let’s quickly go over the Chinese tax system. Taxes are an important source of revenue for the Chinese government and play a key role in funding social programs, infrastructure projects, and other government initiatives. That is to say, the Chinese tax system is an important part of the country’s economy and plays a critical role in funding government programs and services.
There are many different types of taxes in China. Check out the table below for details.
|Type of Tax
|Personal income tax, corporate income tax
|Value-added tax (VAT), consumption tax
|Other taxes and fees
|Stamp duty, land appreciation tax, and property tax
Indirect Taxes / Turnover Taxes
In China, indirect taxes, also known as turnover tax, are taxes that are levied on goods and services, rather than on income or profits. The two main types of indirect taxes in China are Value-Added Tax (VAT) and Consumption Tax (CT). Turnover tax is an indirect tax that applies to activities, and it can be transferred from the supplier of goods or services to the purchaser.
Value-Added Tax (VAT)
In China, there is a tax called Value-Added Tax (VAT) which is added to goods and services during their production and distribution. Value-added tax is one of two turnover taxes in China. It works similarly to a sales tax, where the tax is charged at each stage of production based on the value added during that stage. Taxpayers subject to VAT in China are classified into two categories: general taxpayers and small-scale taxpayers. This classification is based on their yearly taxable sales amount. Businesses must charge the appropriate VAT rate on their goods or services, depending on the type of product or service they are offering.
In China, general VAT taxpayers are businesses or people who have registered with the tax authorities and are responsible for calculating, reporting, and paying VAT on their own. To make the process of calculating VAT easier, they must maintain thorough records of all their taxable transactions, including invoices and receipts.
Small-scale taxpayers in China are businesses or individuals who are eligible for a simplified VAT calculation and reporting process. They pay a lower tax rate than bigger businesses, which makes it easier for them to manage their taxes. In China, there are three types of Value-Added Tax (VAT) rates. The common varied VAT rates are summarized in the following table:
|Standard VAT rate applied to most goods and services
|Sales and imports of most goods (unless otherwise specified), clothing, furniture, construction services, entertainment; hotel; restaurants, telephone calls; postal; transport and logistics
|Reduced VAT rate applied to specific goods
|Books, newspapers, some food items
|Standard VAT rate applied to most goods and services
|Financial and insurance services, education, healthcare, technology; consulting, travel
The VAT (Value-Added Tax) Refund Policy
Starting from March 2022, the Chinese government has been carrying out significant value-added tax (VAT) credit refunds for selected sectors in order to support cash flow for enterprises and maintain a stable macroeconomic performance. The VAT refund policy in China allows businesses to claim back the VAT that they have paid on purchases that are used for taxable activities. The policy is designed to reduce the tax burden on businesses and promote economic growth.
In order to claim a VAT refund, businesses must meet certain criteria, such as being registered with the tax authorities, having a good tax compliance record, and having valid VAT invoices or fapiaos for their purchases. The refund rate varies depending on the nature of the goods or services purchased and the tax rate applicable to them.
What is Fapiao and Why is it Important in the Value-Added Tax (VAT) System?
In China, businesses that are registered for Value-Added Tax (VAT) are required to issue a fapiao for every sale they make. A fapiao is a special type of invoice that serves as proof of purchase for the buyer and is necessary for the seller to claim the input tax credit. The issuance of fapiao is a crucial part of the VAT system in China, as it helps to ensure compliance and prevent tax evasion.
There are two types of fapiao in China: general fapiao and special fapiao. General fapiao can be issued for most goods and services, while special fapiao is used for certain industries, such as transportation, construction, and finance. Special fapiao has more detailed information about the transaction, such as the name and tax identification number of the buyer and seller, and is necessary for the buyer to claim the input tax credit.
When issuing a fapiao, the seller must include certain information, such as their name, address, and tax identification number, as well as the name and address of the buyer, the date of the transaction, and the amount of VAT charged. The fapiao must be issued in a timely manner, typically within three days of the transaction, and must be kept on file for future reference.
In addition to issuing fapiao, businesses in China are also required to keep accurate records of their transactions and to file regular tax returns with the tax authorities. The tax authorities conduct regular audits and inspections to ensure compliance with tax laws and regulations, and failure to comply can result in penalties and fines. The use of fapiao is an important aspect of the VAT system in China, as it helps to ensure transparency and accountability in business transactions and helps the tax authorities to collect the appropriate amount of tax revenue.
Consumption tax is an indirect tax applied to specific goods and services considered to be non-essential or luxury items. This tax is levied on those who manufacture, import, process under consignment and sell taxable products in China. The Consumption Tax is imposed on individuals and organizations engaged in the production, processing, and importation of specific goods and services deemed non-essential or luxury items in China. These products include tobacco, alcohol, jewelry, cosmetics, high-end watches, passenger cars, motorcycles, and non-renewable petroleum products like gasoline and diesel oil. Consumption tax rates vary according to the type and value of the product.
The tax serves as a way for the government to discourage the over-consumption of certain goods that are harmful to health, society, and the environment, while also generating revenue for the government. Companies that process taxable goods for others are responsible for withholding and paying consumption tax based on the raw materials’ value. Monthly filing and payment of consumption tax are mandatory.
What are the Differences between VAT and Consumption Tax?
Value-Added Tax (VAT) is a consumption tax that is applied to the value added to goods and services at each stage of production or distribution. The tax is calculated based on the difference between the value of the goods or services sold and the cost of the inputs used to produce them. VAT is a multi-stage tax, which means that it is collected and remitted by businesses at each stage of production and distribution.
In China, the VAT system is divided into two categories: the general VAT rate and the reduced VAT rate. The general VAT rate is 13%, which applies to most goods and services. The reduced VAT rate of 9% applies to certain goods and services, such as agricultural products, natural gas, and water. Some goods and services are exempt from VAT, including healthcare, education, and financial services.
Consumption tax, on the other hand, is a tax that is imposed on specific goods and services that are considered luxury or non-essential. The tax is usually applied at the point of sale or import, and the rates are based on the type of goods. In China, the tax rates for consumption tax range from 1% to 45%, with higher rates applied to luxury goods such as tobacco, alcohol, and high-end jewelry.
In terms of taxable activities, VAT covers a wide range of goods and services, including manufacturing, wholesale, retail, transportation, and services. This means that businesses across different sectors are required to register for VAT and to charge VAT on their sales. Consumption tax, on the other hand, only applies to specific luxury goods and services, which means that not all businesses are required to register for the tax.
Despite their differences in tax bases, rates, and taxable activities, VAT and Consumption tax share similarities in terms of tax administration and compliance. Both taxes require businesses to register with the tax authorities and to issue invoices for sales. The tax authorities conduct regular audits and inspections to ensure compliance with tax laws and regulations. In addition, businesses are required to file tax returns and remit the taxes owed to the tax authorities on a regular basis.
In conclusion, while VAT and consumption tax are different types of indirect taxes in China, they share similarities in terms of tax administration and compliance. Businesses must understand the differences and similarities between these taxes to ensure compliance with tax laws and regulations and to avoid any potential penalties or fines.
The Impact of Turnover Taxes on Businesses in China
The turnover tax system in China has several benefits for businesses, including:
- Simplicity: The turnover tax system is relatively simple compared to other types of taxation, such as VAT or income tax. It is based on a fixed percentage of a business’s revenue, which makes it easy to calculate and understand.
- Cost-effectiveness: The turnover tax system is generally less costly to administer than other types of taxation, such as the VAT or income tax. This is especially beneficial for small businesses with limited resources.
- Cash flow: The turnover tax system can be beneficial for businesses with irregular cash flows. Because the tax is based on revenue, businesses do not have to pay taxes when they are experiencing financial difficulties.
- Encourages small business growth: The turnover tax system can be beneficial for small businesses that are just starting out or have limited resources. It can help to reduce the financial burden of taxation and encourage the growth of small businesses.
- Incentivizes compliance: The turnover tax system can incentivize businesses to comply with tax laws and regulations. Because the tax is based on revenue, businesses have a direct financial incentive to report all their sales accurately.
In conclusion, the turnover tax system in China has several advantages for businesses, including simplicity, cost-effectiveness, cash flow benefits, encouragement of small business growth, and incentivization of compliance.
The turnover tax in China consists of value-added tax (VAT) and consumption tax, which are indirect taxes levied on the sales of goods and services by businesses. VAT is charged on the production and distribution of goods and services and is classified into general taxpayers and small-scale taxpayers. Fapiao is a necessary invoice for businesses to claim input tax credits, and businesses must issue them for every sale made. Consumption tax is imposed on non-essential or luxury goods and services, with rates varying depending on the type and value of the goods or services. The issuance of fapiao is crucial to ensure compliance and prevent tax evasion in the VAT system in China.
The turnover tax system in China has several advantages for businesses, including simplicity, cost-effectiveness, cash flow benefits, encouragement of small business growth, and incentivization of compliance. It is based on a fixed percentage of a business’s revenue, making it easy to calculate and understand. It is also less costly to administer than other types of taxation.