VAT Refund for Hiring Disabled Employees: An Explainer

China grants businesses value-added tax (VAT) refund treatment for hiring disabled employees, in a move to promote the employment of people with disabilities. In this article, Amber Liu, Senior Manager of the Accounting and Tax Services team in South China, introduces the condition, eligibility, calculation, and time limit of this preferential tax policy, and compares it with other VAT incentives. 

To protect and promote the employment of disabled persons, as early as 2016, the Ministry of Finance (MOF) and the State Taxation Administration (STA) jointly released the Notice on Preferential Value-Added Tax Policies for Promoting Employment of the Disabled (Cai Shui [2016] No.52) encouraging enterprises to employ disabled persons by granting certain VAT refund treatment to businesses.

Later in the same year, the STA released the Announcement of the State Administration of Taxation on Promulgation of the Administrative Measures on VAT Incentives for Promoting Employment of Disabled Persons (STA Announcement [2016] No.33), further explaining the policy details.

That said, many companies are not familiar with this preferential tax policy and thus have not made full use of it.

What is the policy of VAT refund for hiring disabled employees?

According to Cai Shui [2016] No.52 and STA Announcement [2016] No.33, for entities and individually owned businesses employing the disabled, taxation authorities shall adopt the method of refund immediately after payment of VAT with a limit based on the number of the disabled employed.

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The specific limit of VAT refundable for each disabled employee shall be determined by the taxation authorities at the county level or above based on four times the minimum monthly wage standards applicable in the districts or counties.

“The disabled” refers to natural persons holding the Certificate of the People’s Republic of China for the Disabled (《中华人民共和国残疾人证》) or Certificate of the People’s Republic of China for the Disabled Soldiers (Grades 1 to 8) (《中华人民共和国残疾军人证（1至8级）》) under the legal working age, including the psychiatrically disabled with working conditions and willingness to work.

Which types of companies are eligible to benefit from the VAT refund policy for employing individuals with disabilities?

To be eligible for the VAT refund policy for hiring the disabled, companies need to satisfy the following requirements:

• Their income from applicable VAT items accounts for over 50 percent of their total income. The applicable VAT items include:
  • production and sales of goods;
  • provision of processing, repair, and supply services; and
  • provision of taxable items within the scope of modern services and life services (excluding cultural and sports services and entertainment services).
• Taxpayer’s income from the direct sale of purchased goods (including wholesale and retail sales) and sale of consignment processing goods do not apply to this preferential VAT refund policy.
• Taxpayers shall conduct separate accounting for the above-mentioned sales revenue entitled to preferential taxation policies and the sales revenue of businesses not eligible for the said policies. 
• The company’s tax credit rating shall be above C or D as assessed by the tax authorities.

What are the conditions for eligible taxpayers to enjoy the preferential policy of VAT refund for hiring disabled employees?

According to Cai Shui [2016] No.52 and STA Announcement [2016] No.33, the following conditions should be met to enjoy the VAT refund policy for hiring the disabled:

1. The ratio of the number of the taxpayer’s disabled employees (excluding blind massage businesses) each month to the number of the taxpayers’ in-service employees should reach 25 percent or more, and the number of the disabled employed by the taxpayer should be no less than 10;
2. The company has signed labor contracts or service agreements with a term of one year or longer with each disabled individual it employs;
3. The taxpayer has contributed monthly to the social insurance such as the basic pension insurance, basic medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance in full amount for each disabled it employs; and
4. The taxpayer has, through banks or other financial institutions, paid wages not less than the minimum monthly wage rate applicable in the district or county where it is located to each disabled it employs monthly.

“Number of in-service employees” refers to the number of employees that have established labor relations and signed labor contracts or service agreements with taxpayers by the law.

How much VAT can be refunded?

To determine the VAT payment refundable, the following calculation formula should be applied:

• If the amount of VAT paid in the current tax period in a tax year is insufficient to be refunded, it can be refunded from the balance of the VAT paid in the previous tax period in the current tax year, after deducting the already refunded VAT in that period;
• If it is still insufficient for refund, the refund can be carried forward to and refunded in the following tax period in the current tax year, but it shall not be carried forward to the next tax year. 
• If the tax payment period is not monthly, the VAT can only be refunded for the month in which it is eligible.

Accordingly, where the paid VAT amount of the year is less than or equal to the refundable amount of the year, the refund amount shall be the paid VAT amount for the year. Where the paid VAT amount of the year is more than the refundable amount of the year, the tax refund amount shall be the refundable amount of the year.

What if a company is also eligible for other VAT refund policies?

If both the VAT incentives for the promotion of employment of the disabled and the preferential VAT policies for support of employment of key groups, demobilized soldiers, military family dependent, ex-servicemen, etc., are applicable, taxpayers may choose applicable preferential policies at their discretion, but such preferential policies cannot be accumulated in implementation. Once selected, no changes can be made within 36 months.

Besides, in addition to the VAT refund policy for promoting employment, China also has a series of other preferential VAT policies, such as the excess input VAT refund and the export VAT refund. Below we briefly introduce these policies and compare the differences.

Excess input VAT refund

Excess input VAT refund, or the so-called “VAT rebate policy”, refers to the full refund of incremental VAT credit on a monthly basis to micro and small firms in all industries and qualified enterprises in another 13 industries.

Previously, when a company’s input VAT (VAT paid to suppliers for purchasing goods and services) exceeds the output VAT (VAT for sale of goods, services, and intangible assets), 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.

Under the excess input VAT refund policy, eligible businesses can enjoy a refund on their excess input VAT. Taxpayers could apply for a one-time refund of the remaining tax credits, as well as a monthly full refund of incremental VAT credit.

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

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

The 13 industries include:

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

Export tax refund

Export tax refund refers to a refund of part or all of the VAT and consumption tax (CT) paid on exported goods during the production and circulation process.

Can companies apply these VAT refund policies at the same time?

For a manufacturing company that exports goods, it can enjoy an export tax refund and excess input VAT refund at the same time, and it shall first apply for an export VAT refund and then if there is still uncredited input VAT, the company can apply for a refund of the excess input VAT.

For a manufacturing company that has both domestic sales and export sales, the eligible company can apply for both the export VAT refund and the VAT refund for hiring the disabled, but the two policies cannot be applied in the same month.

Companies are suggested to carefully study the abovementioned preferential VAT policies and choose the most appropriate strategy to reduce their tax burdens.

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