China’s VAT Rebates Policy: Eligibility, Timeline, and Procedures

June 7, 2022 Posted by China Briefing Written by Arendse Huld Reading Time: 12 minutes

China’s VAT rebates policy was first proposed during the 2022 Two Sessions. On March 21, 2022, the Ministry of Finance (MOF) and the State Taxation Administration (STA) released detailed guidelines to clarify the eligibility, timeline, procedure, and relevant definitions of the large-scale policy. Moreover, the payment schedule for VAT rebates has been accelerated to provide cash flow support to struggling enterprises and ease the mounting economic pressure faced by China’s economy. In this article, we explain how the VAT rebates policy works, including eligibility, application timeline, calculation of rebate, and procedures for applying for VAT credit refunds. Foreign companies and their China subsidiaries that belong to eligible categories can also apply for a full refund of incremental VAT credit on a monthly basis and a one-off refund of their remaining VAT credit.

UPDATE: On June 7, 2022, the Ministry of Finance and State Tax Administration issued a notice to expand the scope of China’s VAT rebates to companies in seven more industries, in addition to the ones already eligible. Companies in these additional seven industries can now also apply for monthly refunds of incremental VAT credits and a one-time refund of remaining VAT credits from July 1, 2022 onward. Click here to jump to the section on the full requirements for companies to apply for VAT credit refunds.

In the face of growing economic pressure from COVD-19 containment measures, high operational costs, and global logistics and macroeconomic turmoil, China has released a slate of tax relief measures to ease the burden on small businesses and companies in key industries.

Specifically, the government has pledged around RMB 1.5 trillion (approx. US$ 238 billion) of large-scale tax rebates on VAT credit over the course of 2022. To increase the efficiency and effectiveness of the rebates, the government also issued directives to speed up the payment of refunds for certain businesses.

Foreign businesses and their subsidiaries that fall under the categories of eligible companies eligible can apply for a full refund of incremental VAT credit on a monthly basis and a one-off refund of their remaining VAT credit accordingly.

In this article, we explain which companies can apply for VAT rebates in 2022, when they can apply for the rebates, and how to calculate VAT credits and apply for the refund.

Note: For the purpose of this article, VAT rebates and VAT credit refunds are mutually used to refer to the VAT relief provided in China.

Background

What are VAT rebates?

VAT, or value-added tax, is one of the major indirect taxes levied in China. Rates range from six to 13 percent for general VAT taxpayers. VAT credit is the overpaid input VAT at the end of each taxable period when the input VAT exceeds the output VAT.

Previously, the period-end uncredited VAT was not refundable in the current taxable period but could be carried forward to and be deducted in the next taxable period. Since April 2019, when China began deepening VAT reform, qualified taxpayers in all industries were allowed to apply for uncredited VAT refunds in the current taxable period. Starting in June 2019, qualified taxpayers in the advanced manufacturing industry were able to enjoy a similar but more relaxed policy.

Are you seeking support on VAT rebates or have a china tax query? Our experts can help

Now, the VAT credit refund policy will be applied even more broadly. The full refund of incremental VAT credit on a monthly basis, which was previously only available to companies in the advanced manufacturing industry, is now available to micro and small firms in all industries and qualified enterprises in another 13 industries.

Moreover, qualified enterprises will enjoy a one-off refund of their remaining VAT credit in turn following a decided calendar.

Expansion of VAT rebates in 2022

In the 2022 Government Work Report released on March 5, the government announced that an estimated RMB 2.5 trillion would be handed out in tax rebates and cuts in 2022, of which RMB 1.5 trillion would be earmarked for tax rebates specifically. All of these funds would go directly to eligible companies, the report stated.

The government provided more details on the arrangements for the tax cuts and rebates during a weekly State Council meeting chaired by Premier Li Keqiang on March 21. According to a readout of the meeting, RMB 1 trillion of the funds will be provided as VAT refunds to micro and small enterprises (MSEs) and sole proprietorships in all industries.

The VAT relief is a key measure for stabilizing development, stabilizing market entities, and ensuring employment and also serves to conserve tax sources and improve the VAT system, according to the readout.

In addition to MSEs and sole proprietorships, the remaining tax credits for eligible companies of all sizes in certain industries will be refunded in full between July 1 and the end of the year.

On March 22, 2021, the Ministry of Finance (MOF) released an announcement [Announcement (2022) No. 14] that provided more details on the expansion of the VAT credit refunds for MSEs and qualified companies in six specific industries, clarifying the eligibility criteria for companies, how to assess the number of VAT credits that can be refunded and other definitions.

On April 17, 2022, the MOF released another announcement [Announcement (2022) No. 17] calling for tax offices to speed up the refund of VAT for micro, small, and medium-sized enterprises (MSMEs).

On May 17, 2022, the MOF released another announcement [Announcement (2022) No. 19] calling for tax offices to speed up the refund of VAT for large enterprises.

On June 7, the MOF and STA issued another notice [Announcement (2022) No. 21], further expanding the scope of companies eligible for VAT credit refunds to include those in an additional seven industries.

Who can apply for VAT rebates?

Generally, qualified micro and small firms in all industries and all qualified enterprises in 13 industries can apply for VAT rebates.

What are micro and small firms?

Micro, small, medium, and large companies are specific legal designations in China, as stipulated in regulatory documents, such as the Small and Medium-Sized Enterprises Classification Standard Regulations.

The specific parameters for company size depend on the industry in which the company is operating. Below are some of the size parameters for various industries. Note that large companies are defined as companies with operating income, assets, and staff numbers above the designated threshold for medium-sized companies in each industry.

Company Size Classification by Industry
Sector	Micro	Small	Medium
Industry (including mining, manufacturing, electricity, heat, gas, and water production and supply)	– Fewer than 20 employees; or – Operating income of less than RMB 3 million	– 20 employees or more; and – Operating income of RMB 3 million or more	– Between 300 and 1,000 employees; and – Operating income of between RMB 20 million and RMB 400 million.
Construction	– Operating income of less than RMB 3 million; or – Total assets of less than RMB 3 million	– Operating income of RMB 3 million and above; and – Total assets of RMB 3 million and above	– Operating income of between RMB 60 million and RMB 800 million; and – Total assets between RMB 50 million and RMB 800 million.
Retail	– Fewer than 10 employees; or – Operating income of less than RMB 1 million	– 10 or more employees; and – Operating income of RMB 1 million or more	– Between 50 and 300 employees; and – Operating income of between RMB 5 million and RMB 200 million
Transport and logistics	– Fewer than 20 employees; or – Operating income of less than RMB 2 million	– 20 employees or more; and – Operating income of RMB 2 million or more	– Between 300 and 1,000 employees; and – Operating income of between RMB 30 million and RMB 300 million
Catering	– Fewer than 10 employees; or – Operating income with less than RMB 1 million	– 10 or more employees; and – Operating income of RMB 1 million or more	– Between 100 and 300 employees; and – Operating income of between RMB 20 million and RMB 100 million
Information transmission	– Fewer than 10 employees; or – Operating income of less than RMB 1 million	– 10 or more employees; and – Operating income of RMB 1 million or more	– Between 100 and 2,000 employees; and – Operating income of between RMB 10 million and RMB 1 billion
Software and information technology	– Fewer than 10 employees; or – Operating income of below RMB 500,000	– 10 or more employees; and – Operating income of RMB 500,000 or more	– Between 100 and 300 employees; and – Operating income of between RMB 10 million and RMB 100 million
Real estate	– Operating income of below RMB 1 million; or – Total assets below RMB 20 million	– Operating income of RMB 1 million and above; and – Total assets of RMB 20 million	– Operating income of between RMB 10 million and RMB 2 billion above; and – Total assets of between RMB 50 million and RMB 100 million.
Source: Small and Medium-Sized Enterprises Classification Standard Regulations Note: The above list is not exhaustive.

Company Size Classification by Industry

Sector

Micro

Small

Medium

Industry (including mining, manufacturing, electricity, heat, gas, and water production and supply)

– Fewer than 20 employees; or

– Operating income of less than RMB 3 million

– 20 employees or more; and

– Operating income of RMB 3 million or more

– Between 300 and 1,000 employees; and

– Operating income of between RMB 20 million and RMB 400 million.

Construction

– Operating income of less than RMB 3 million; or

– Total assets of less than RMB 3 million

– Operating income of RMB 3 million and above; and

– Total assets of RMB 3 million and above

– Operating income of between RMB 60 million and RMB 800 million; and

– Total assets between RMB 50 million and RMB 800 million.

Retail

– Fewer than 10 employees; or

– Operating income of less than RMB 1 million

– 10 or more employees; and

– Operating income of RMB 1 million or more

– Between 50 and 300 employees; and

– Operating income of between RMB 5 million and RMB 200 million

Transport and logistics

– Fewer than 20 employees; or

– Operating income of less than RMB 2 million

– 20 employees or more; and

– Operating income of RMB 2 million or more

– Between 300 and 1,000 employees; and

– Operating income of between RMB 30 million and RMB 300 million

Catering

– Fewer than 10 employees; or

– Operating income with less than RMB 1 million

– 10 or more employees; and

– Operating income of RMB 1 million or more

– Between 100 and 300 employees; and

– Operating income of between RMB 20 million and RMB 100 million

Information transmission

– Fewer than 10 employees; or

– Operating income of less than RMB 1 million

– 10 or more employees; and

– Operating income of RMB 1 million or more

– Between 100 and 2,000 employees; and

– Operating income of between RMB 10 million and RMB 1 billion

Software and information technology

– Fewer than 10 employees; or

– Operating income of below RMB 500,000

– 10 or more employees; and

– Operating income of RMB 500,000 or more

– Between 100 and 300 employees; and

– Operating income of between RMB 10 million and RMB 100 million

Real estate

– Operating income of below RMB 1 million; or

– Total assets below RMB 20 million

– Operating income of RMB 1 million and above; and

– Total assets of RMB 20 million

– Operating income of between RMB 10 million and RMB 2 billion above; and

– Total assets of between RMB 50 million and RMB 100 million.

Source: Small and Medium-Sized Enterprises Classification Standard Regulations

Note: The above list is not exhaustive.

Total assets are determined according to the taxpayer’s end-of-year value in the previous fiscal year. Operating income is determined according to the taxpayer’s VAT sales in the previous fiscal year. If the duration of VAT sales amounts to less than one fiscal year, it is calculated according to the following formula:

VAT sales (year) = VAT sales during the actual duration of the enterprise in the previous fiscal year / number of months of the actual duration of the enterprise × 12

The STA announcement released on June 7, 2022 also further clarified that the industry that an MSE belongs to is determined by looking at which industry accounted for the company’s highest proportion of its total VAT sales in the previous fiscal year. The industry is determined as per the definition in the Industrial Classification for National Economic Activities (PDF) (link in Chinese). This requirement is effective as of June 7, 2022.

Which industries are eligible for VAT rebates?

As stipulated in the STA Announcement (2022) No. 14 released on March 22, 2022, the VAT rebate policy has been extended to include all eligible companies in the following six industries:

Manufacturing
Scientific R&D and technology services
Electricity, heating, gas, and water production and supply
Software and information technology services
Ecological protection and environmental governance
Transport, logistics, warehousing, and postal

The STA Announcement (2022) No. 21 released on June 7, 2022, further expanded this policy to cover companies in an additional seven industries, which are:

Wholesale and retail
Agriculture, forestry, animal husbandry, and fishery
Hospitality and catering
Residence, repairs, and other services
Education
Healthcare and social work
Culture, sports, and entertainment

To qualify for VAT rebates, VAT sales related to one of the 13 industries listed above must account for over 50 percent of the company’s total VAT sales. The 13 industries are determined per the legal definition in the Industrial Classification for National Economic Activities.

The proportion of VAT sales is calculated and determined based on the company’s sales for 12 consecutive months before applying for the refund. If the company has been operating for less than 12 months but more than three months prior to applying for the refund, then the VAT sales are calculated and determined based on the sales during the actual operating period.

Which companies are “qualified”?

Qualified enterprises refer to companies that meet all of the following criteria:

Have an A or B tax credit rating.
Have not fraudulently obtained tax refunds for remaining credits, fraudulently obtained export tax refunds, or falsely issued special VAT invoices in the 36 months prior to the application.
Have not been punished twice or more by the tax authority for tax evasion within 36 months of applying for the tax refund.
Have not enjoyed the preferential policy of “refund upon payment and return (refund) after payment” since April 1, 2019.

All MSEs and companies in the 13 industries must meet the above criteria to qualify for the VAT credit rebates.

Timeline for applying for VAT rebates

Micro, small enterprises, and sole proprietorships

Qualified MSEs can apply to the competent tax authority for a refund of incremental tax credits on a monthly basis starting from the tax filing period in April 2022.

The timeline for application of the one-time refund of the remaining tax credit is as follows:

From the tax filing period in April 2022, eligible micro-enterprises could apply for a one-time refund of the remaining tax credits to the competent tax authority.
From the tax filing period in May 2022, eligible small enterprises can apply for a one-time refund of the remaining tax credits to the competent tax authority.

The MOF announcement released on March 21 stated that VAT refunds for MSEs should be paid by April 30 and June 30 respectively, on the basis of voluntary applications by the companies.

Companies in the 13 industries

Companies in the 12 industries listed above are eligible for a full refund of incremental VAT credits on a monthly basis as well as a one-time refund of the remaining tax credits.

Starting from the tax filing period in April 2022, enterprises in the first list of six industries can apply for refunds of incremental tax credits to the competent tax authority.

Moreover, medium and large enterprises in these six industries can also apply for a one-time refund of the remaining tax credits (micro and small in the six industries are also eligible for this by default under the conditions for MSEs described above). The timeline for application is as follows:

Starting from the tax filing period in May 2022, qualified medium-sized enterprises in the six industries can apply to the competent tax authority for a one-time refund of the remaining tax credits.
From the tax declaration period in June 2022, qualified large enterprises in the six industries can apply for a one-time refund of the remaining tax credit to the competent tax authority.

According to the April 17, 2022 announcement and the May 17, 2022 announcement of the MOF, the remaining tax credits will be refunded to medium-sized and large enterprises in the first list of six industries before June 30, 2022, on the basis of a voluntary application by taxpayers.

Meanwhile, companies in the second list of seven industries can apply for both the refund of incremental VAT credits and one-time refund of remaining VAT credits from July 1, 2022. The announcement did not specify a deadline for the refund of VAT credits for companies in these seven industries.

How is the VAT rebate amount calculated?

Defining incremental and remaining VAT credit

The MOF announcement released on March 22, 2022, clarified that both incremental input VAT credit and the remaining VAT credits can be refunded under the scheme.

The incremental VAT credit is determined by distinguishing between the two following situations:

Before a taxpayer obtains a one-time refund of the remaining VAT credit, the incremental VAT credit is the newly increased tax credit at the end of the current period compared with March 31, 2019.
After the taxpayer obtains a one-off tax refund for the remaining VAT credit, the incremental tax credit shall be the end-of-period tax credit.

The remaining VAT credit is determined according to the following circumstances:

Before a taxpayer obtains a one-time refund of the remaining VAT credit, if the amount of VAT credit retained at the end of the current period is more or equal to the amount of tax credit retained at the end of March 31, 2019, the amount of the remaining VAT credit is the same as the amount of VAT credit retained at the end of March 31, 2019;
If the amount of VAT credit retained at the end of the current period is less than the amount of tax credit retained at the end of March 31, 2019, then the amount of remaining VAT credit is the same as the amount of tax credit retained at the end of the current period.
After the taxpayer obtains a one-off tax refund for the remaining VAT credit, the remaining VAT credit will be zero.

Calculating VAT credit amount

To calculate the amount of VAT credits that can be refunded, companies can follow the following formula:

Incremental tax credits allowed to be refunded = incremental tax credits × input VAT ratio × 100%

Remaining tax credits allowed to be refunded = remaining tax credits × input VAT ratio × 100%

Input VAT ratio refers to the ratio of VAT amount indicated on relevant VAT invoices (or fapiao) which have been credited from April 2019 up until the tax period prior to the application for tax refund, to the total credited input VAT in the same period. Relevant VAT invoices here include:

Special VAT invoices (including fully digitized electronic invoices with the words “special VAT invoices” and unified tax-controlled motor vehicle sales invoices)
General electronic invoices for toll road VAT
Customs Import VAT Special Payment Note
Receipts of tax payment certificate

According to STA Announcement [2022] No. 4, when calculating the input VAT ratio, the input VAT transferred out by a taxpayer – as required from April 2019 up until the tax period before the application for tax refund is filed – does not need to be deducted from the VAT amount indicated on any relevant VAT invoices that have been deducted.

How to apply for VAT refunds

To apply for a VAT refund, companies must first complete the filing and payment of VAT for the current period before they can apply for the VAT return. To apply, companies must submit the Tax Refund (Credit) Application Form (PDF) (link in Chinese) through the Electronic Taxation Bureau (link in Chinese) or to the Tax Service Office.

Taxpayers that have already taken advantage of the preferential policy of “refund upon payment and return (refund) after payment” since April 2019 can still apply for a refund of the remaining VAT credits – if they first return the previously refunded VAT. The full amount must be repaid before October 31, 2022. This can be done by submitting the Application Form for the Return of Excess Input VAT Credits through the Electronic Taxation Bureau (link in Chinese) or to the Tax Service Office.

The other side of the coin: Intensifying the crackdown on tax fraud

While China substantially expands and accelerates the implementation of the VAT rebate policy, it is also stepping up the crackdown on fraudulent and criminal behavior.

From April 1 to May 10, 2022, the public security and tax authorities have launched investigations into more than 1,800 enterprises suspected of defrauding tax refunds and confirmed that 448 enterprises have obtained tax refunds illegally or fraudulently, involving RMB 822 million in tax refunds. 74 cases of fraudulent tax refunds have been publicly exposed.

On May 17, 2022, the STA and other five regulators jointly released the Circular on Severely Cracking Down on Illegal and Criminal Acts of Defrauding Value-added Tax (VAT) Credit Refunds, which further demonstrates China’s determination in combating fraud in VAT rebate procedures.

In cases where a company has fraudulently obtained the remaining tax refund by falsely increasing items, making false declarations, or other deceptive means, the tax authority will recover the fraudulently obtained tax refund, and deal with it in accordance with the Law of the People’s Republic of China on the Administration of Tax Collection, the Administrative Penalty Law of the People’s Republic of China , and other relevant regulations.

Although the laws do not stipulate a specific punishment or fine for VAT credit refund fraud, typical cases released by the STA show that companies found to have engaged in fraudulent behavior to obtain VAT refunds have been recommended fines of up to two times the total amount of tax fraudulently obtained.

It is therefore extremely important that companies adhere to China’s tax laws and follow application guidelines closely to ensure that they do not increase the amount of input VAT on the application, whether on purpose or by accident.

If your business requires assistance with tax refunds, preferential tax policies, or other tax issues, you can consult our local experts by contacting us at china@dezshira.com.

This article was first published on May 26, 2022, and last updated on June 7, 2022, to include the latest information on VAT refund policies.

About Us

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into 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 firm for assistance in China at china@dezshira.com.

Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.

Menu

China’s VAT Rebates Policy: Eligibility, Timeline, and Procedures