When a sourcing project gets to a certain size, it often makes sense to set up a permanent presence on-the-ground in China to help manage the supply chain. This series of blog posts covers some of the key areas of consideration when it comes to setting up in China.
Value-added Tax (“VAT”)
VAT applies to enterprises engaged in importation, production, distribution or retailing activities in respect of tangible goods and a few prescribed services. Input VAT incurred (i.e. the VAT paid on goods, certain prescribed VAT-able services and equipment acquired) may be credited against output VAT (i.e. the VAT collected from the customers) in computing the VAT payable.
The general VAT rate is 17% but necessities, such as agricultural and utility items, are taxed at 13%. Certain limited categories of goods are exempt from VAT. However, certain luxury Enterprises regarded as small businesses (annual production sales of less than RMB 0.5 million or annual wholesale or retail sales of less than RMB 0.8 million) are subject to VAT at the rate of 3%.
Unlike other VAT payers, small businesses are not entitled to claim input VAT credits for the VAT paid on their purchases.
Exports of goods from China may be entitled to a refund of VAT incurred on materials purchased domestically. As the refund rates ranges from 0% to 17% and there is a prescribed formula fordetermining the amount of refund, many products do not enjoy the full refund of input VAT credit and suffer different degree of export VAT costs.
Written for CSIC by Sophie Mao
China based lawyer at www.AsiaBridgeLaw.com