China introduces new VAT refund mechanism on a trial basis
The Announcement on Relevant Policies for Deepening Value-Added Tax Reform (Announcement [2019] No.39), jointly issued by Ministry of Finance, State Taxation Administration and General Administration of Customs introduces some of the major steps taken VAT reforms. Apart from further reduction of VAT rates in the regulation, it introduced new rules regarding refund of VAT credits.
One of the features of the Chinese VAT system is that excess input VAT credits are not eligible for direct VAT refund. Such excess input VAT credit can only be carried for forward for offset with output VAT in future tax periods. If one business is in a long state of having huge excess input VAT without sufficient output VAT to offset, it could cause considerable cash-flow issue carrying significant VAT credit non cash.
The Announcement No.39 introduced, for the first time, a VAT refund mechanism what will take effect from 1 April 2019 on a trial basis.
To be eligible for a refund of incremental VAT credit, a taxpayer needs to meet all the following conditions:
As of the taxation period of April, 2019, the incremental VAT credit is greater than zero for six consecutive months (or two consecutive quarters if the VAT is paid quarterly), and the sixth month's incremental VAT credit is not less than CNY500,000;
The tax payment credit rating is Grade A or Grade B;
No fraudulent VAT credit rebate or export VAT rebate and no false issuance of special VAT invoice within the 3 year period preceding the applicable tax refund.
No more than twice tax evasion penalties within the 3 year period preceding the applicable tax refund.
The taxpayer has not benefited from the VAT refund upon collection and VAT refund after collection policies from 1 April 2019.
The refundable incremental VAT credit refers to newly added period-end VAT credit compared with that by the end of March 2019. Therefore VAT credit balance amounts prior to 1 April 2019 are not refundable.
Incremental VAT credit refundable to the taxpayer for the current period shall be calculated as per the following formula:
Refundable incremental VAT credit = Incremental VAT credit × Input composition ratio × 60%
The input composition ratio refers to the proportion of the VAT indicated on the offset special VAT invoice (including the unified invoice of vehicle sales for tax control) from April 2019 to the previous taxation period prior to applying for a VAT rebate, the customs import special VAT payment certificate, the remitted VAT payment receipt and all the offset input VAT for the same period.
To apply for the refund of uncredited tax, a taxpayer shall submit the Application Form for Tax Refund (Offset) through the e-tax bureau or in the taxpayer service hall, after it has filed the tax return for the current period in the VAT filing period (the "filing period"), from the month after it meets conditions for the refund of uncredited tax.