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A Different Perspective to Interpret VAT Exemption Policies to Small-Scale Taxpayers

In Brief

The State Administration of Taxation (“SAT”) issued the Public Notice of Value Added Tax Exemption to Small-Scale Taxpayers (Public Notice [2022] No. 15, hereafter “Public Notice 15”) on 24th March 2022, and the Public Notice 15 sets force that small-scale Value Added Taxpayers are exempted from paying Value Added Tax (“VAT”) for the period from 1st April 2022 to 31st December 2022. Furthermore, the preferential VAT rate of 1% applicable to small-scale taxpayer during the pandemic will end on 31st March 2022. SAT further published the Interpretation to the Public Notice 15 and stipulated that small-scale taxpayers issuing VAT special fapiao to their customers are subject to VAT at the rate of 3%.

Observations

Since the pandemic of COVID-19 in 2020, the applicable VAT rate for small-scale taxpayers was reduced from 3% to 1%, and those whose monthly income is less than RMB150K (or quarterly income is less than RMB450K) are exempted from paying VAT. Public Notice 15 further reduces the tax burden for small-scale taxpayers by cancelling the non-taxable threshold and lowering the tax rate to 0%. For industries like catering and most of the 2C business, this is definitely good news.

However, for the small-scale taxpayers that engage in 2B business and issue VAT special fapiao to their customers, the case would be different.

The existing VAT policies for small-scale taxpayer are summarized in the below table:

Monthly Income /

Quarterly Income

VAT General Fapiao VAT Special Fapiao
Less than RMB150K /

Less than RMB450K

0% 1%
More than RMB150K /

More than RMB450K

1% 1%

The new VAT policies set forth in Public Notice 15 are summarized in the below table:

Monthly Income /

Quarterly Income

VAT General Fapiao VAT Special Fapiao
Less than RMB150K /

Less than RMB450K

0% 3%
More than RMB150K /

More than RMB450K

0% 3%

It is concluded from the above tables that small-scale taxpayers that issue VAT special fapiao shall pay more VAT (from 1% to 3%) from 1st April 2022.

 

Our Advice

As discussed above, in order to enjoy the new VAT exemption benefit, small-scale taxpayers should review the contracts with their customers immediately and negotiate what type of VAT fapiao should be issued. We list the below 4 scenarios for your consideration:

Fees are VAT exclusive Fees are VAT inclusive
VAT General Fapiao Scenario 1 Scenario 2
VAT Special Fapiao Scenario 3 Scenario 4
  1. Fees that you charge to your customers are VAT exclusive and you are issuing VAT general fapiao

Your customer may ask you to waive the VAT as you don’t have to pay VAT from 1st April 2022.

  1. Fees that you charge to your customers are VAT inclusive and you are issuing VAT general fapiao

You may benefit from the new policy as you don’t need to pay VAT from 1st April 2022 but the fees you charge remains the same. However, it is likely that your customer would request you to lower down the fee to exclude the VAT.

  1. Fees that you charge to your customers are VAT exclusive and you are issuing VAT special fapiao

Since the VAT is exclusive from the fees, you shall change the VAT rate from 1% to 3% starting from 1st April 2022. Your customers bear the VAT, and they can deduct it from their output VAT.

  1. Fees that you charge to your customers are VAT inclusive and you are issuing VAT special fapiao

This is the worst scenario where you need to bear the additional 2% VAT as the policy changes. Our suggestion is that you negotiate with your customer to agree on a VAT exclusive fee, and then issue VAT general fapiao to the customer. For example, your current fee is RMB10,000 inclusive of 1% VAT, you may propose to adjust the fee to RMB9,900 (RMB10,000 / 1.01) and issue VAT general fapiao. In this case, neither party lose money on VAT.

 

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