Input VAT refund policy expanded

China’s Ministry of Finance and the State Administration of Taxation (STA) issued guidance on 21 and 22 March 2022 (Circulars No. 14 and 4) that allows qualifying taxpayers to obtain a refund for excess input VAT credits on a monthly basis. Circular No. 14 sets out the new policy and Circular No. 4 includes the implementing rules. On 24 March, the STA issued Circular No. 15, which provides an exemption from VAT for small-scale taxpayers for the period 1 April through 31 December 2022. These new policies—which apply as from 1 April—are designed to ease the burdens on businesses, support the development of micro and small enterprises, boost the manufacturing and other sectors, and enhance the confidence of market participants.

Under China’s VAT rules, a business is required to pay VAT on the difference between its output tax and its input tax. If the amount of the output tax is insufficient to cover the input tax, the excess (i.e., overpaid input VAT) may be carried forward and offset against output VAT in the next taxable period. Certain taxpayers are permitted to request a refund of the uncredited input VAT in the current period.

Circular No. 14

Under the previous policy, the main entities that benefited from the VAT refund were those in the advanced manufacturing sector. Circular No. 14 expands the scope of businesses entitled to the VAT refund policy, thus allowing many more businesses to benefit. Under the revised policy, the following entities may be entitled to the VAT refund:

Micro and small enterprises, including individually owned businesses; and
Entities in the manufacturing and certain other key industries:
- Scientific research and technical;
- Electricity, heating, gas and water production and supply;
- Software and information technology;
- Ecological protection and environmental governance and transport;
- Warehousing; and
- Postal services.

To qualify, an entity must:

Have a tax credit rating of A or B;
Not have obtained a VAT credit refund or export tax refund in a fraudulent manner or falsely issued a VAT invoice in the 36-month period before applying for the VAT refund;
Not have been subject to two or more penalties for tax evasion in the 36-month period before the application for the VAT refund; and
Not have benefited from the “immediate refund upon payment" or “refund after payment” of excess VAT since 1 April 2019 (the date the STA launched a pilot program for refunds of unutilised input VAT).

Calculation method for VAT credit refund

According to the revised policy, there are two calculation methods for the VAT credit refund:

Refundable incremental VAT credit amount = Incremental VAT credit amount* × Portion of input tax** × 100%
Refundable existing VAT credit amount = Existing VAT credit amount*** × Portion of input tax × 100%

* The incremental VAT credit amount differs depending on whether the taxpayer has received a lump sum refund of its existing VAT credit amount:

Before refund - the incremental VAT credit amount is the newly increased VAT credit amount, i.e., the difference between the VAT credit amount at the end of the current period and that at 31 March 2019; and
After refund - the incremental VAT credit amount is the VAT credit amount at the end of the current period.

** The portion of input tax is the amount of VAT stated in special VAT invoices, electronic general VAT invoices for turnpike tolls, special customs certificates for payment of import VAT and tax payment certificates issued by withholding agents that has been credited as input tax during the period from April 2019 to the tax period before that in which a VAT refund application is made, in which the VAT credit amount to be refunded falls, as a percentage of the total amount that has been credited as input tax during the same period.

*** The existing VAT credit amount also depends on whether the taxpayer has received a lump sum refund of its existing VAT credit amount:

Before refund - if the credit amount at the end of the current period is greater than or equal to the credit amount on 31 March 2019, the existing VAT credit amount is the credit amount at that date; otherwise, the existing credit amount is the amount at the end of the current period; and
After refund - the existing VAT credit amount is zero.

Circular No. 4

Circular No. 4 contains the detailed requirements to benefit from the VAT credit refund; in particular, an entity that wishes to apply for the VAT credit refund must complete the VAT filing for the current period and then submit the refund application to the STA.

For qualifying and low-risk entities, the STA will further optimise the VAT credit refund service process, improve the service level and simplify the review procedure to facilitate access to rapid VAT credit refunds.

BDO insights

The new refund policy generally should be welcomed by affected businesses. However, businesses should be aware of the following:

Different tax authorities may have different and/or conflicting interpretations of what constitutes a small and micro enterprise and enterprise in the manufacturing and other sectors. Affected entities may wish to consider communicating with the in-charge tax authorities to understand their positions.

The A or B tax credit rating requirement is important; obtaining either of these ratings requires entities to be fully compliant with the tax laws and regulations. Affected entities should consider performing a health check to determine whether they have been noncompliant and the implications of such noncompliance, and rectify their positions as soon as possible.
The VAT credit refund calculation methods are complicated and the refund process potentially may vary from location to location. Entities should consider quantifying the potential amount of the refund and engage in preliminary communications with the tax authorities and obtaining professional assistance.

Gordon Gao
gordon.g@bdo.com.cn

Jack Shen
jack.shen@bdo.com.cn