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Alex He Brian Wang Yi Zhang
April 29, 2019 Article 3 min read

New reductions in the VAT and a lower-effective corporate income tax rate are providing benefits to small businesses in China. Here’s a summary of the changes.

The VAT rate adjustment

The main change in the VAT reduction is on general domestic sales of goods, imported goods, processing, repair and maintenance (reduced from 16 to 13 percent), and on transportation, construction services, real estate leasing, postal and telecommunication services, etc. (reduced from 10 to 9 percent). A summary is included below.

tables showing new VAT rates for general sales/import of goods and transportation

This reduction should provide significant relief to companies’ operational costs, particularly in the manufacturing sector.

This reduction should provide significant relief to companies’ operational costs, particularly in the manufacturing sector.

Other changes to the VAT include:

  1. Shortened period of input VAT credit for immovable property: Under the previous regulations, deduction of input VAT from output VAT for immovable property or construction work in progress had to be split across a two-year period. The new policy has cancelled this two-year rule and, starting from April 1, 2019, any newly incurred or remaining input VAT can be used as a one-time deduction.
  2. Deduction of input VAT credit for domestic travel: Individual taxpayers who purchase transportation services for domestic travel can now deduct the amount of input VAT paid from the output VAT. (Under the previous policy, input VAT tax associated with domestic travel wasn’t allowed to be deducted from output VAT due to the difficulty of validating the business-related expense.) The new policy will further reduce the tax burden for companies on employees’ business-related travel costs.
  3. Super deduction of input VAT applied to services industry: Although the services sector doesn’t directly benefit from the VAT rate cut under the new policy, the State Council has issued additional regulations to lower tax burdens for service providers. From April 1, 2019 to Dec. 31, 2021, taxpayers from the service sectors related to postal, telecommunication, Modern Services (MS), and lifestyle will enjoy an additional 10 percent super deduction of input VAT (in addition to existing, deductible input VAT).
  4. Retained input VAT refund: Starting April 1, 2019, qualified taxpayers are eligible to claim a partial refund of retained input VAT (excessive input VAT). Under the previous regulation, companies weren’t allowed to claim an input VAT refund when their input VAT surpassed their output VAT. The excess amount could be carried into the following period as tax credit, but a tax refund wasn’t allowed. In some circumstances, this created cash flow issues, especially when large initial investments were involved. This reform removes this restriction and allows a partial refund for eligible taxpayers, promoting positive impacts on the cash flows.

Further reduction in effective corporate income tax rate

Between Jan. 1, 2019 and Dec. 31, 2021, the effective income tax rate for small-scaled and minimal profit companies is reduced to 5 percent for the first RMB 1 million taxable income. For taxable income between RMB 1 million and RMB 3 million, the effective income tax rate is reduced to 10 percent. The effective income tax rate remains unchanged at 25 percent for taxable income of over RMB 3 million.

Small-scaled and minimal profit companies are those engaging in nonrestricted and nonprohibited industries in China and that meet all of the following conditions:

  • Annual taxable income is no more than RMB 3 million.
  • Annual average number of employees doesn’t exceed 300.
  • Total assets not exceeding RMB 50 million.

Implementation of this policy is expected to provide a significant boost to the economy because more than 80 percent of companies in China are small-scaled and minimal profit firms.

We expect that the tax authority will issue more detailed guidance on how to implement and exercise these changes. We encourage companies to follow the updates closely, assess the business impact, and consider appropriate adjustments in their business planning and operations.

If you have questions or concerns, reach out to a member of our international services team.