China: Value-added Tax (“VAT”) Taxpayer Status in the PRC - Legal Requirements and Practical Consequences

Last Updated: 5 September 2008
Article by Susanne Rademacher and Daisy Duan
  1. General introduction to the VAT system in the PRC

VAT is a turnover tax levied on all units and individuals engaged in the sale of goods, the provision of processing, repair and replacement services (together referred to as "taxable labour services") and the importation of goods to the PRC.

The standard VAT rate is 17%, and a reduced rate of 13% or even 0% applies to certain items.

PRC regulations categorise taxpayers as general VAT taxpayers and small-scale VAT taxpayers, depending on sales volume and the soundness of their accounting system. General VAT taxpayer status is not granted automatically but subject to the approval of the tax authorities.

General VAT taxpayers with an adequate accounting system are allowed to reduce their VAT burden by crediting input VAT against Output VAT, which is demonstrated by a special VAT invoice.

Small-scale VAT taxpayers are generally entities that have insignificant VAT transactions or are unable to properly account for their input and output VAT due to an inadequate accounting system. They are subject to a simplified VAT calculation method, with a VAT rate of 4% for trading enterprises and 6% for production-oriented and other enterprises. No credit or deduction is allowed for input VAT.

2. Computation of VAT payable for general VAT taxpayer

2.1 Calculation formula

General VAT taxpayers are entitled to use VAT invoices for crediting input VAT against output VAT. The VAT payable by general VAT taxpayers on the sale of goods or supply of taxable labour services is calculated according to the following formula:

Tax Payable = output VAT for the current period – input VAT for the current period

Output VAT = sales revenue (VAT exclusive) * VAT rate

Input VAT = VAT payable on purchase of goods or receipt of taxable labour services

Where the input VAT is higher than the output VAT for any given month, the excess amount can be carried over to the next month and offset against VAT liabilities. There is no time limit for carrying over the excess, and the taxpayer cannot obtain a refund if it remains unused.

2.2 Non-creditable input VAT

According to Article 10 of the PRC VAT Provisional Regulations, effective as of 1 January 1994 ("Provisional VAT Regulations"), input VAT credit cannot be claimed for the following: purchase of fixed assets; activities subject to business tax; tax-exempt items; goods or taxable labour services used for group welfare or personal consumption and abnormal or extraordinary losses

2.3 Time limit for input VAT certification and credit

Pursuant to the Circular on the Issues of Deduction of Input VAT Invoices Issued by the VAT Control System Received by General VAT Taxpayers, effective as of 1 March 2003, a general VAT taxpayer will only obtain a credit for input VAT if it applies to the tax authority for certification within 90 days after the VAT Control System issues a special VAT invoice.

The certified VAT invoice must be filed for credit against output VAT during the month it is certified.

2.4 Concurrent non-taxable and taxable activities

The Provisional VAT Regulations require all VAT taxpayers who concurrently engage in (1) provision of non-taxable services (e.g., transportation, finance, insurance, construction, installation, culture and sports, entertainment and other non-taxable services) and (2) the sale of goods and/or the provision of taxable labour services to account for these two categories of activities separately. In such cases the non-taxable services are subject to business tax ("BT"), whereas the sale of goods and the provision of taxable labour services are subject to VAT. Where no accurate separate accounting can be performed, the non-taxable services will be subject to VAT together with the sale of goods and the provision of taxable labour services.

2.5 Mixed sales activities

A mixed sales activity refers to a single transaction that involves both the sale of goods (subject to VAT) and the provision of non-taxable labour services (subject to BT).

According to the Provisional VAT Regulations, whether mixed sales activities are subject to VAT or BT depends on the nature of the enterprise:

  1. Mixed sales activities conducted by an enterprise or an individual business operator that is principally engaged in the production or sale of goods (wholesale or retail) as its main business are regarded as sales of goods and subject to VAT, and
  2. Mixed sales activities conducted by other units or individuals are regarded as sales of non-taxable labour services and subject to BT.

An enterprise will be considered "principally engaged in the production or sale of goods (wholesale or retail) as its main business" if its annual income from sales of goods and taxable labour services exceeds 50% of its total annual sales income.

3. Becoming a general VAT taxpayer

The law treats an enterprise as a small-scale VAT taxpayer unless it fulfils the criteria for being recognised as a general VAT taxpayer.

3.1 General application criteria

In accordance with the Measures for Recognizing the Application of General VAT Taxpayers issued by the State Administration of Taxation and effective as of 15 March 1994 ("General VAT Taxpayer Measures"), general VAT taxpayers refer to enterprises and units with the qualities of an enterprise whose annual sales subject to VAT ("Taxable Sales") exceed the threshold for small-scale taxpayers as stipulated by the Ministry of Finance ("MOF"). Enterprises that have an inadequate accounting system may not be recognised as general VAT taxpayers, even if the Taxable Sales exceed the threshold for small-scale VAT taxpayers.

Pursuant to the Detailed Rules for the Implementation of the Interim Regulations of PRC Value-added Taxes issued by the MOF and effective from 25 December 1993, the following are considered small-scale taxpayers:

  1. Taxpayers that are only or mainly engaged in production or provision of taxable labour services and have Taxable Sales of less than RMB 1 million in a calendar year, and
  2. Taxpayers that are engaged in wholesale or retail sales and have Taxable Sales of less than RMB 1.8 million in a calendar year.

The tax authorities may, however, recognise as a general VAT taxpayer a small-scale non-commercial or trading enterprise with annual Taxable Sales over RMB 300,000 if it maintains an adequate accounting system and files tax returns as stipulated by law.

Individuals, non-enterprise units and enterprises that are not frequently engaged in taxable activities are treated as small-scale taxpayers, regardless whether their Taxable Sales exceed the threshold for the small-scale taxpayers.

Non-commercial or trading enterprises may be recognised as general VAT taxpayers upon tax registration if their estimated Taxable Sales exceed the threshold for small-scale taxpayers.

3.2 Special rules for newly established commercial or trading enterprises

  1. Administration Rules

Newly established commercial or trading enterprises are subject to different administrative rules for general VAT taxpayer status, depending on the circumstances of such enterprises, as follows:

  • Newly established small commercial or trading enterprises are treated as small-scale taxpayers upon tax registration. Such enterprises are entitled to apply for the status of general VAT taxpayers with competent tax authorities starting the month after their Taxable Sales exceed RMB 1.8 million.
  • The tax authority provides guidance on the payment of tax for six months after approval of general VAT taxpayer status. At the end of the guidance period, subject to examination and approval by the relevant tax authority, the applicant enterprise is formally recognised as a general VAT taxpayer.
  • Newly established retail enterprises with fixed operating premises and physical ownership of goods, or newly established medium and large commercial or trading enterprise with a registered capital of more than RMB 5 million and a staff of more than 50 people, may apply for the general VAT taxpayer status upon tax registration. Such enterprises may be approved as general VAT taxpayers and enter into the guidance period before being formally recognised as general VAT taxpayers.
  • Certain qualified enterprises may even be directly recognised as general VAT taxpayers without going through the guidance period.

(2) Limited number of "special VAT invoices"

The law allows the tax authorities to sell a limited number of special VAT invoices to enterprises during the guidance period noted above based on information collected during discussions with enterprise personnel and site inspections. The maximum value for small commercial or trading enterprises is RMB 10,000 per invoice issued by the VAT Control System, whereas the maximum value for retail enterprises and medium and large commercial or trading enterprises may be higher, depending on the circumstances of these enterprises. The relevant tax authorities determine the number of special VAT invoices supplied to the enterprises, up to a maximum of 25 per month.

Additional special VAT invoices may be purchased by enterprises that have run out of invoices purchased for a particular month, provided that VAT equivalent to 4% of the sales value stated on the special VAT invoices issued on the previous occasion is paid in advance to the relevant tax authority. No additional special VAT invoices may otherwise be sold to the enterprise. The balance of such advance VAT payment will be refunded to the taxpayer within the first month after the expiration of the guidance period.

3.3 Required documents

Documentary requirements for being classified as a general VAT taxpayer vary by location. An application in Chaoyang District, Beijing, for example, requires the following:

  1. Application letter to the competent tax authority to obtain the "Application Form for the Approval as General VAT Taxpayer". The application letter should include the establishment date, business scope, business model and business address, status of account setting, a statement that the input VAT, output VAT and tax payable are calculated accurately, the accounting personnel status, a statement that relevant materials and filings can be submitted on time, and other conditions necessary to be presented as required by law;
  2. Duplicate original of the tax registration certificate and a copy of the same;
  3. Copy of the business licence;
  4. Copy of the passport of the legal representative;
  5. Copies of the ID cards and qualification certificates of the finance chief and the tax staff;
  6. Copies of the Bank Opening Approval Certificate, Bank Account Opening Verification and special transfer credit voucher;
  7. Verification of the operation address, tenancy agreement, property ownership certificate of the owner of the leased premises and copy of the rental invoice for the last three months;
  8. Copies of the sales contract, articles of association and other agreements in relation to the main business;
  9. VAT Anti-counterfeit Tax Control System Application Form; and
  10. Other documents required by the responsible tax office.

3.4 Timeframe

Article 9 of the General VAT Taxpayer Measures instructs the tax authorities to complete the examination and approval of the general VAT taxpayer application within 30 days after receiving a complete application documents.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions