Important VAT Notice for China-Based SME’s Over Tax Threshold Status

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Feb 15 – The Chinese State Administration of Taxation has clarified the situation for small taxpayers whose annual turnover has exceeded the small taxpayer threshold.

Issued on January 25, Guoshuihan [2010] No. 35 requests that local tax bureaus bring forward and recognize all small taxpayers whose income exceeds the threshold to general taxpayer status by June 30, 2010. The circular also recognizes that small taxpayers must also recognize the change to general taxpayer status despite the fact that they will be unable to issue VAT invoices until the SAT upgrades its system. This issue is key as small taxpayers (businesses with a turnover of less than RMB500,000 for production, RMB800,000 for wholesaling or retailing) can currently enjoy VAT rates of 3 percent against the normal 17 percent.

This means that small tax payers in China whose turnover is now higher than the amounts described must register as general taxpayers by the end of June or bear the full burden of 17 percent VAT on their books as they will be unable to issue VAT invoices and claim input VAT.

It is highly important for small taxpayer status businesses in China to register immediately with the local tax bureau for general taxpayer status if their turnover has reached beyond the RMB500,000 (production) or RMB800,000 (retail) threshold.

Small foreign-owned businesses in China affected by this ruling or requiring assistance with general tax payer registrations may contact Sabrina Zhang, the national tax partner for Dezan Shira & Associates at tax@dezshira.com.