In February 2020, the Ministry of Finance (MOF) and the State Taxation Administration (STA) in Mainland China issued a series of circulars to provide tax incentives, including VAT incentives, to help businesses that are affected by the Covid-19 outbreak.
Tax exemption for goods for donation
On 1 February the MOF and STA, together with the General Administration of Customs, issued Bulletin 6 to provide that imported goods used for the prevention and control of Covid-19 and to be donated to public welfare organizations or government authorities are exempted from import VAT, customs duty and consumption tax. Such goods include reagents, disinfection materials, protecting appliances, ambulances, epidemic control vehicles, disinfection vehicles and emergency command cars.
On 6 February, the MOF and STA issued Bulletin 9 to provide tax incentives for the donation of anti-epidemic goods. Donation of anti-epidemic goods directly to hospitals or through public welfare organizations or government authorities is exempted from VAT, consumption tax, urban maintenance and construction tax, education surcharge and local surcharges.
These policy measures aim to ensure the imported and domestic supply of anti-epidemic goods.
Excess input VAT refund
Bulletin 8 issued on 6 February included some VAT incentives. For example, manufacturers of key anti-epidemic goods can apply for full refund of excess input VAT (incremental excess input VAT compared with the end of December 2019) on a monthly basis.
As part of the VAT incentives effective from 1 April 2019, a new programme was introduced to allow qualifying general VAT payers to claim a partial refund of excessive input VAT, i.e. the uncredited input VAT in excess of output VAT. Compared with the current refund policy, the newly announced excess input VAT refund for manufacturers of key anti-epidemic goods is more preferential. There is no requirement to have incremental excess input VAT for six months. Instead, the qualifying taxpayers can apply for refund of excess input VAT on a monthly basis as long as there is incremental excess input VAT compared with the excess input VAT as of the end of December 2019. And there is no 60% limit of the refundable input VAT.
The excess input VAT refund policy is a very positive step forward in Chinese VAT reform. It is especially welcomed by taxpayers who have made big capital investments and suffer from cash flow pressure. The tax authorities will review the input VAT of the company and if incompliance is detected, the application may be put on hold. So we suggest businesses review the refund basis and improve internal control before application. Businesses can also properly arrange the purchasing and sales to meet the conditions for application at an earlier stage.
Exemption, reduction of VAT rate and extension of tax filing deadlines
Bulletin 8 also provided that VAT is exempted for revenue derived from transportation of key anti-epidemic goods. Revenue generated from services including public transportation, lifestyle and courier delivery are exempted from VAT. A taxpayer can benefit from the VAT exemption if the price agreed with its customers is inclusive of VAT. In such case, with the total price remaining unchanged, the sales revenue and profit of the business could increase as a result of the VAT exemption. Please note that the input VAT attributable to the exempted supply cannot be recovered. This reduces the effectiveness of the incentive.
Small businesses are particularly vulnerable to the impact of the pandemic. On 28 February, the MOF issued Bulletin 13 to provide VAT exemption for small-scale VAT payers in Hubei Province in the period from 1 March to 31 May. For small-scale VAT payers outside Hubei Province, the VAT collection rate is lowered from 3% to 1% during the same period. This is aimed to help small businesses that are negatively impacted by Covid-19. The VAT exemption and reduction for small-scale taxpayers can reduce the tax burden of small businesses in the covered period. Please note, this policy has now been extended from 31 May to 31 December 2020.
To address the cash flow problems of some taxpayers, the STA extended the tax filing deadline in March, April and May. In addition, taxpayers who still have difficulty making tax payment can apply for a further extension.
Increase of export VAT refund rates
In order to boost export business, the executive meeting of the State Council on 10 March decided to raise the export VAT refund rates for all goods to be same as their applicable VAT rates, except for goods considered as high polluting, high energy consuming or resource-intensive. On 17 March, the MOF and STA issued Bulletin 15 to implement this decision. After this round of adjustments, there would be four export VAT refund rates: 13%, 9%, 6% and 0%. The new export VAT refund rates became effective on 20 March.
The increase of export VAT refund rates is the latest incentive announced. There are 1,464 goods whose export VAT refund rates are to be raised, representing about 16% of total HS code items in the current Chinese tariff schedule. These include 1,084 items whose rates are to be raised to 13% (eg certain silicon dioxide products and certain acyclic hydrocarbons whose original rate is 10%); and 380 items whose rates are to be raised to 9% (eg pork, beef, lamb, certain nuts and coffee products whose original rate is 6%).
The rate adjustment may affect a broad range of sectors such as agriculture, animal husbandry, food processing, chemicals, plastic and rubber, paper, ceramics, iron and steel and non-ferrous metals. There are more than 620 organic chemical products whose refund rates would be raised.
Products that are already enjoying a full export VAT refund are not impacted. With the increased refund rates, the relevant exporters would be able to enjoy the full refund of the VAT incurred for the exported goods.
We suggest taxpayers should evaluate the potential impact of the increase of the export VAT refund rate, review pricing strategy and negotiate with foreign buyers about the export prices adjustment if necessary and commercially feasible. They should also arrange the export timing appropriately as the new rate applies to exports made on or after 20 March, with the export date determined by the date shown on export customs declaration forms. They could also consider whether to further optimize their overall business model with the increased refund rates.
Sarah Chin, Deloitte Global Tax and Legal Chief Operating Officer and National Indirect Tax & Customs Leader (China), and Liqun Gao, Tax Partner, Deloitte China