1. Value-Added Tax

As a type of turnover tax, value-added tax (VAT) is levied on the
increased value of commodities at different stages of production or
circulation, or on the value-added of commodities. All enterprises
and individuals engaged in the sale or import of goods or the
provision of processing, repair or maintenance services in China
have to pay VAT.

(a) Taxpayer

In China, VAT payers are divided into general taxpayers and small-scale taxpayers on the basis of their operation scale and accounting and auditing system, with different methods of tax computation.

Small-scale taxpayers are taxpayers without a sound accounting and auditing system whose taxable value of sales is below the prescribed standards, namely Rmb1 million for taxpayers engaged in the production of goods or the provision of taxable services, and less than Rmb1.8 million for those engaged in wholesaling or retailing business.

General taxpayers mainly refer to enterprises whose annual taxable sales value exceeds that of small-scale taxpayers. Small production enterprises with a sound accounting and auditing system may be classified as general taxpayers. However, individuals, non-enterprise units, and enterprises that do not regularly engage in taxable operations are classified as small-scale taxpayers even if their annual taxable sales value exceeds the standards for small-scale taxpayers.

(b) Method of Computation

* Small-scale taxpayer

VAT payable by small-scale taxpayers is calculated by a simple method on the basis of the sales value and the tax rate without offset or deduction for input VAT.

The applicable rate is 4% for commercial enterprises and 6% for other operations. The formula for the computation of VAT is as follows:

Tax payable = sales value * tax rate (4% or 6%)

VAT on consignment sale, sale of unredeemed goods by pawn shops and retail sale of duty-free goods by approved duty-free shops, is levied at a rate of 4% using the above simple method of computation regardless of whether it is paid by a small-scale taxpayer. For the sale of second-hand goods, VAT is levied at half of the tax rate of 4%.

* General taxpayer

The actual amount of VAT payable by general taxpayers is the excess amount of output VAT over input VAT. The formula for the computation of the tax payable is as follows:

Tax payable = current output VAT - current input VAT

Output VAT = sales value * applicable tax rate

If the current output VAT is smaller than the current input VAT, the amount that cannot be fully set off or deducted may be carried over to the following tax period.

* VAT on imported goods

VAT on goods imported by taxpayers is computed on the basis of the composite assessable value and the applicable tax rate without offset or deduction for input VAT. The formula for the computation of the tax payable is as follows:

Tax payable = composite assessable valuex applicable tax rate

Composite assessable value = customs dutiable value + customs duty

For taxpayers importing taxable consumer goods, the consumption tax payable will be added to the composite assessable value.