Written by Delilah Li, China Consultancy team, CW CPA
On 17 January 2019, the Ministry of Finance and the State Administration of Taxation jointly issued a Circular on implementing the preferential tax reduction and exemption policy for small and micro businesses. The policy is expected to reduce RMB 200 billion worth of taxes annually for small and micro businesses.
|Notice of the Ministry of Finance and the State Administration of Taxation on Implementation of Inclusive Tax Relief Policy for Small Low-profit Enterprises
(Cai Shui  No. 13)
|17 January 2019|
|Announcement of the State Administration of Taxation on Issues Relating to Implementation of Inclusive Income Tax Relief Policy for Small Low-profit Enterprises
(SAT Announcement  No. 2)
|18 January 2019|
|Announcement of the State Administration of Taxation on Tax Collection Issues Relating to VAT Exemption Policies for Small-scale Taxpayers
(SAT Announcement  No. 4)
|19 January 2019|
|Announcement of the State Administration of Taxation on Tax Collection Issues Relating to Local Taxes and Related Additional Reduction Policies for VAT Small-scale Taxpayers (SAT Announcement  No. 5)||19 January 2019|
The policy applies to income tax assessment year from 1 January 2019 to 31 December 2021.
VAT Exemption for Small-scale Taxpayers
For a small-scale taxpayer [i]with aggregate monthly sales not exceeding RMB 100,000 (or quarterly sales not exceeding RMB 300,000) shall be exempted from VAT. If a small-scale taxpayer’s aggregate monthly sales exceed RMB 100,000, but the balance after deducting the sales incurred in the current period for the sale of immovables does not exceed RMB 100,000, the sales amount for the sale of goods, labor services, services and intangible assets shall be exempted from VAT.
A general taxpayer with accumulative sales not exceeding RMB 5 million over the last 12 months (or 4 quarters) may opt to convert and re-register as a small-scale taxpayer before 31 December 2019.
Depending on the actual situation in each region, local taxes[ii] can be reduced within 50% for small-scale VAT taxpayers. Taxpayers shall voluntarily declare and claim reduction incentives on their own and need not submit additional materials.
Enterprise Income Tax (EIT) Reduction for Small Low-profit Enterprises
The portion of annual taxable income of a small low-profit enterprise which does not exceed RMB 1 million shall be calculated at a reduced rate of 25% as taxable income amount and be subject to EIT at 20% tax rate. The portion over RMB 1 million but not exceeding RMB 3 million shall be calculated at a reduced rate of 50% as taxable income amount and be subject to EIT at 20% tax rate.
As illustrated in Table 1, the new tax relief scheme has increased the upper limit of annual taxable income amount to RMB 3 million (compared to previously RMB 1 million) and introduced progressive tax rate system.
Previously, enterprises with annual taxable income over RMB 1 million but less that RMB 3 million were not within the scope of Small and Low-profit Enterprises and was subject to EIT rate 25%. The new tax relief policy has greatly reduced the income tax burden for these enterprises, as illustrated in Table 2.
Criteria for being considered a small and low-profit enterprise
An enterprise should satisfy the following criteria simultaneously to be considered as small and low-profit enterprises:
- engaging in non-restricted and non-prohibited businesses;
- annual taxable income amount does not exceed RMB 3 million;
- staff headcount does not exceed 300; and
- total assets do not exceed RMB 50 million.
It should be noted that the definition of “small-scale taxpayer” shall not be confused with “small and low-profit enterprises”. An enterprise having annual taxable sales value below RMB 5 million[i] qualifies to be a small-scale taxpayer for VAT purpose. Otherwise, it should register itself as a “general taxpayer”. The classification of small-scale taxpayer and general taxpayer serves the purpose for VAT assessment.
The standard for small and low-profit enterprises is used for assessing the eligibility of reduced EIT rates. In other words, a general taxpayer, with annual taxable sales value above RMB5 million, may be qualified as a small and low-profit enterprise and enjoy reduced EIT rates, so long as they fulfill the above 4 criteria.
Hopefully, the tax reduction and exemption policy will help small and micro businesses sailing through uncertain time of a slowing global growth and the trade dispute with the United States. Nevertheless, small and micro businesses should carefully evaluate their current financial position should they wish to fully utilize these incentives, such as:
- General taxpayers should perform cashflow and sales forecast to determine whether it is more beneficial for them to re-register as small-scale taxpayers before 31 December 2019 in order to enjoy VAT exemption.
- For EIT reduction, small and low-profit enterprises with annual taxable income amount is predicted close to RMB 3 million should monitor the income level closely so as not to fall outside of the scope of small and low-profit enterprises.
- Small businesses whose annual taxable income is slightly above RMB 3 million, but satisfy all other criteria, may do tax planning to improve operational costs and reduce tax burden.
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[i] Small-scale taxpayers are VAT taxpayers whose annual taxable sales value falls below RMB 5 million.
[ii] Local taxes: resource tax, urban maintenance and construction tax, property tax, urban land use tax, stamp duty, arable land use tax, education surcharge and local education surcharge
[iii] Cai Shui  No.33