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Input VAT Credit Refund Policies in China

On 21 March 2022, in order to support the development of micro and small enterprises, manufacturing and other industries, boost confidence of market players and stimulate the market development, the Ministry of Finance (MOF) and the State Taxation Administration (STA) released Announcement [2022] No. 14, which expands the scope of policies for monthly full refund of incremental VAT credit for the advanced manufacturers to qualified micro and small enterprises in all industries as well as qualified medium and large-sized enterprises in manufacturing and other industries (including individually owned businesses) and also allows the refund of the accumulated VAT credit to the qualified enterprises in a one-off manner.

To help market players tide over difficulties caused by the pandemic, Announcements [2022] No. 17 and [2022] No. 19 on further accelerating the implementation of the VAT credit refund policies were released by the MOF and the STA on 17 April and 17 May 2022 respectively, allowing accumulated VAT credit refund in advance to medium and large -sized enterprises engaging in the manufacturing and other industries respectively.

Historical Background

Prior to 1 April 2019, if a taxpayer had unutilized input VAT, its only option generally was to carry forward the unutilized input VAT to offset against output VAT incurred in the subsequent tax period and it was not possible to obtain a refund of unutilized input VAT.

Effective as from 1 April 2019, a pilot system mentioned in Announcement [2019] No. 39 of the MOF, the STA and the General Administration of Customs allowed qualifying enterprises in all industries to obtain a partial refund of the “incremental unutilized input VAT,” which was computed by comparing the unutilized input VAT at the end of an assessment period against that on 31 March 2019. This policy was later modified to provide larger refund amounts at an earlier stage for certain advanced manufacturing enterprises (see Announcements [2019] No. 84 and [2021] No. 15 of the MOF and the STA).

Qualified Enterprises
  • Micro and small enterprises in all industries (including individually owned businesses)
  • Medium and large-sized enterprises in manufacturing and other industries (including individually owned businesses). “Enterprises in manufacturing and other industries” refers to taxpayers engaging in the “manufacturing “, “scientific research and technical services industry”, “power, heating, gas and water manufacturing and supply industries”, “software and information technology services industry”, “ecological protection and environmental control industry” and “transportation, warehousing and postal industries” specified in the Industrial Classification for National Economic Activities, for which the ratio of the corresponding VAT sales amount exceeds 50% of their total VAT sales amount.
  • Medium and large-sized enterprises in “wholesale and retail”, “agriculture, forestry, animal husbandry and fishery”, “accommodation and catering”, “residential services, repair and other services”, “education”, “health and social work”, and “culture, sports and entertainment”* specified in the Industrial Classification for National Economic Activities, for which the ratio of the corresponding VAT sales amount exceeds 50% of their total VAT sales amount.

To qualify for the VAT credit refund policies, enterprises should also satisfy all the following criteria*:

 

  • Their tax payment creditworthiness is rated as Grade A or Grade B;
  • They have not committed fraud for tax credit refund, fraud for export tax refund or issuance of false special VAT invoices for 36 months prior to the application for tax refund;
  • They have not been penalized by tax authorities for two or more times for tax evasion for 36 months prior to the application for tax refund; and
  • They have not been entitled to the policy of refund-upon-collection or refund-after-collection* as of 1 April 2019.

 

Note:

* By 31 December 2022, the VAT credit refund shall be subject to the above criteria.

* “Refund-upon-collection” refers to the immediate refund of the VAT once it is levied. For example, the software manufacturing enterprises can enjoy this policy. If their actual VAT burden exceeds 3%, the part that exceeds 3% will be refunded immediately upon collection.

* “Refund-after-collection” refers to the VAT refund after it is levied, and some certain conditions are met. For example, the foreign trade companies can report to the competent tax authority on a monthly basis with relevant tax refund documents and get export tax refund.

* If taxpayers who have been entitled to the VAT policies of refund-upon-collection or refund-after-collection since 1 April 2019, return all these refunds in a one-off manner by 31 October 2022, they may apply for the VAT credit refund after that.

*According to Announcement [2022] No. 21, starting from 1 July 2022, the policy for refunding input VAT credits would be expanded to cover firms in more industries including wholesale and retail, agriculture, forestry, animal husbandry and fishery, accommodation and catering, residential services, repair and other services, education, health and social work, and culture, sports and entertainment.

Refund of incremental VAT credit and one-off accumulated input VAT credit

A: Incremental VAT credit allowed to be refunded = incremental VAT credit × input VAT ratio* × 100%

Before a taxpayer obtains a lump sum refund of accumulated VAT credit, the incremental VAT credit shall be the newly increased VAT credit at the end of the current period compared with that as of March 31, 2019; and after a taxpayer obtains a lump sum refund of accumulated VAT credit, the incremental VAT credit shall be the VAT credit at the end of the current period.

B: Accumulated VAT credit allowed to be refunded = accumulated VAT credit × input VAT ratio* × 100%

Before a taxpayer obtains a lump sum refund of accumulated VAT credit, if the VAT credit at the end of the current period is greater than or equal to the end-of-period VAT credit on March 31, 2019, the accumulated VAT credit shall be the end-of-period VAT credit on March 31, 2019; if the VAT credit at the end of the current period is less than the end-of-period VAT credit on March 31, 2019, the accumulated VAT credit shall be the VAT credit at the end of the current period; and after a taxpayer obtains a lump-sum refund of accumulated VAT credit, its accumulated VAT credit will be zero.

Note:

* Input VAT ratio means the ratio of VAT amount indicated on special VAT invoices (including fully digitized electronic invoices bearing the wording “Special VAT Invoices” and standardized tax control invoices for sale of motor vehicles), plain VAT electronic invoices for highway tolls, special Customs payment notices for import VAT, and tax payment receipts which have been credited from April 2019 to the tax period prior to the application for tax refund, to the total credited input VAT in the same period.

Time frame for the input VAT credit refund application
Types of Taxpayers Time Frame for the Refund Application of Incremental Input VAT Credit Time Frame for the Refund Application of Accumulated Input VAT Credit
Micro-sized enterprises From the tax return period in April 2022 From the tax return period

in April 2022

Small-sized enterprises From the tax return period in April 2022 From the tax return period

in May 2022

Medium-sized enterprises engaging in manufacturing and other industries From the tax return period in April 2022 From the tax return period

in May* 2022

Large-sized enterprises engaging in the manufacturing and other industries From the tax return period in April 2022 From the tax return period

in June* 2022

Medium and large-sized enterprises engaging in the wholesale and retail and other industries From the tax return period in July 2022 /

 

Note:

* According to Announcement [2022] No. 17, the provision that “qualified medium-sized enterprises in the manufacturing industry and other industries may apply to the competent tax authorities for the one-off refund of stock uncredited VAT with effect from the tax return period of July 2022” prescribed in Item 2 of Article 2 of the Announcement [2022] No.14 shall be adjusted to be “qualified medium-sized enterprises in the manufacturing industry and other industries may apply to the competent tax authorities for the one-off refund of stock uncredited VAT with effect from the tax return period of May 2022”.

* According to Announcement [2022] No. 19, the provision that “eligible large enterprises in the manufacturing industry or other industries may apply to the competent tax authorities for the one-off refund of outstanding VAT credits with effect from the tax return period of October 2022” prescribed in Item 2 of Article 2 of Announcement [2022] No.14 shall be adjusted to be “eligible large enterprises in the manufacturing industry or other industries may apply to the competent tax authorities for the one-off refund of outstanding VAT credits with effect from the tax return period of June 2022”.

(This article was published on 8 June 2022 and updated on 21 June 2022.)