China’s finance and taxation authorities have announced VAT incentives for 2023 for a number of market entities, including small taxpayers and taxpayers in the manufacturing and lifestyle sectors. The VAT incentives are an extension of previous policies to help vulnerable businesses cope with the challenges posed by the COVID-19 pandemic. Below, we explain the latest policies and discuss what the changes may signal for China’s economy in 2023.
On January 9, 2023, China’s Ministry of Finance (MOF) and the State Taxation Administration (STA) jointly issued a notice to clarify some of their value added tax (VAT) incentives for 2023, including VAT exemption policy for small VAT payers and additional deduction of VAT for taxpayers in the manufacturing and lifestyle sectors.
The Notice on clarification of VAT exemption and other principles for small VAT payers [MOF STA Announcement [2023] No. 1](hereinafter referred to as the “principles of small taxpayers”) will be applied in the period from January 1, 2023 to December 31, 2023.
Along with small taxpayer policies, the STA also issued Notice on matters related to the selection and administration of VAT reduction and exemption policies for small VAT payers [STA Announcement [2023] No. 1](hereinafter referred to as the “VAT administration notice”, specifying the detailed rules for VAT collection and administration.
In this article, we present China’s latest VAT incentives for relevant taxpayers in 2023 and compare them with the previous policies.
Exemption from VAT for small taxpayers in 2023
The policy for small taxpayers clarifies that between January 1, 2023 and December 31, 2023, small taxpayers with a monthly turnover of less than RMB 100,000 (approximately US$14,740) will be exempt from VAT.
That is, if a small taxpayer’s monthly sales are less than RMB 100,000 (approximately US$14,740), or if the quarterly sales are less than RMB 300,000 (approximately US$44,220) for small taxpayers who have chosen one quarter as the period payment of tax, the payer will not be a VAT payer.
This threshold is slightly lower than in 2021 and 2022. From April 1, 2021 to December 31, 2022, the VAT threshold for small taxpayers was RMB 150,000 (approximately US$22,110) per month (or RMB 450,000 per quarter, approximately $66,300).
| VAT thresholds for small taxpayers, 2021 to 2023 | ||
| Monthly sales | Quarterly sales | Effective time |
| 100,000 RMB | 300,000 RMB | January 1, 2021 to March 31, 2021 |
| RMB 150,000 | 450,000 RMB | April 1, 2021 to December 31, 2022 |
| 100,000 RMB | 300,000 RMB | 1 January 2023 to 31 December 2023 |
Meanwhile, the VAT Administration Notice clarifies that small taxpayers with total monthly sales of more than RMB 100,000, but whose sales excluding real estate sales made in the current period are less than RMB 100,000, will be exempted from paying VAT on the sale of goods. , labor services, services and intangible assets.
Small taxpayers may choose to waive the VAT exemption incentive and issue separate VAT invoices for specific sales instead.
VAT reduction for small taxpayers
The policy for small taxpayers clarifies that between January 1, 2023 and December 31, 2023, small taxpayers who are subject to a 3 percent VAT rate can benefit from a reduced tax rate of 1 percent. VAT items that are subject to a 3% advance VAT rate have a reduced advance rate of 1 percent.
Previously, in the period from April 1, 2022 to December 31, 2022, small VAT payers who are subject to a VAT rate of 3 percent will be exempted from VAT payment or prepayment.
The notice from the VAT Administration clarifies that small taxpayers can choose to waive the VAT reduction incentive and issue separate VAT invoices for specific sales instead.
Additional VAT deduction policy for lifestyle and production services
The policy for small taxpayers also clarifies that between 1 January 2023 and 31 December 2023:
- Taxpayers in the production services sector can currently benefit from 5 percent additional VAT deductions based on deductible input VAT.
- Taxpayers in the lifestyle services sector can currently benefit from 10 percent additional VAT deductions based on deductible input VAT.
Taxpayers in production services are those whose revenue from “postal services”, “telecommunications services”, “modern services” and “lifestyle services” (“four services”) accounts for more than 50 percent of their total revenue. The specific scope of the four services should be determined according to Notice of Sale of Services, Intangible Assets and Real Estate [Cai Shui [2016] No. 36].
Lifestyle services taxpayers are those whose “lifestyle services” revenue is more than 50 percent of their total revenue.
Originally, taxpayers in the postal, telecommunications, modern services and lifestyle services industries had a 10 percent additional VAT deduction based on input VAT deductible and lifestyle service taxpayers in the current period from 1 April 2019 to 31 December 2021. from October 1, 2019 to December 31, 2021, it used an additional VAT deduction of 15 percent.
In March 2022, China extended this additional VAT deduction policy until December 31, 2022, according to notification issued by MF and STA.
Then on July 29, 2022, Premier Li Keqiang presided over an executive action State Council and decided to take a series of measures to further strengthen demand, promote efficient investment and increase consumption. Among other things, it reiterated that China will “fully extend the additional VAT deduction to services.”
Now this promise has been carried over into the specific policy, though the percentage of additional deduction is slightly lower than in the original policy.
| Additional VAT deduction rules, 2019 to 2023 | ||
| Old | New | |
| Tax payers in lifestyle services | 10 percent (April 1, 2019 to September 30, 2019)
15 percent (October 1, 2019 to December 31, 2022) |
10 percent (January 1, 2023 to December 31, 2023) |
| Taxpayers in production services | 10 percent (April 1, 2019 to December 31, 2022) | 5 percent (January 1, 2023 to December 31, 2023) |
How to understand VAT incentives 2023
From the information above, we can see that China has extended most of the VAT incentives offered in 2022, but these incentives will be implemented on a slightly reduced scale in 2023.
This is in line with China’s economic situation and policy developments – in 2022, businesses in China faced strict control and preventive measures against COVID-19 under China’s “Zero-COVID” policy. Now that China has officially lifted its centralized quarantine for incoming travelers, resumed issuing visas and passports, and optimized most of its COVID-19 control and prevention measures, analysts have raised their forecasts for China’s real GDP growth to 5.2 percent in 2023 (from 4.7 percent). ).
This means that 2023 will still be a challenging year for China. It will take a significant effort to get the economy back on a normal growth path and rebuild the confidence of business groups and foreign investors in the country’s economic outlook.
We expect China to extend most of the tax incentives it has offered in the past few years, or at least not to suddenly remove preferential policies in 2023.
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