Following a March 21st announcement by the Ministry of Finance and State Taxation Administration, all qualified Micro and Small-Sized Enterprises (MSE) and enterprises engaged in manufacturing and other industries may claim a one-time refund of their Value-Added Tax (VAT) credits starting from the April and May 2022 tax filing periods (MoF, STA [2022] Announcement No. 14).
The new policy allows qualified businesses to refund their existing VAT credits previously incurred by the business on goods and services purchases. For many businesses, this refund helps improve their short-term cash-flow requirements.
This comes at a time when numerous areas in China are experiencing a new wave of COVID-19 cases forcing many retail stores, manufacturing facilities, and offices to temporarily shut down their operation leading some to face severe cash flow constraints.
This policy not only applies to businesses affected by recent lockdowns but also benefits those who are facing a cash shortage due to the general economic downturn. Qualified enterprises that have recently made or are planning to make large capital investments in the business should also take note of the new measures. Taxes paid in relation to capital equipment, for example, can be claimed back in advance as opposed to being used to offsetting output VAT on future sales.
Prior to the announcement, only qualified advanced manufacturing enterprises have been allowed to apply for a 100% refund of VAT credits. MSEs in China have been able to apply for a 60% refund of VAT credits using the “refund-upon-collection” or “refund-after-collection” method. The updated policy allows MSEs and enterprises engaged in manufacturing and other industries to apply for a full VAT credit refund starting from the April and May 2022 tax filing periods.
Types of Refundable VAT Credits
Should businesses decide to apply for a refund, they can expect two separate refunds: 1) Existing VAT credits on or before April 1st, 2019; and 2) Incremental VAT credits incurred after March 31st, 2019.
The Existing VAT credits refer to the VAT credit amount in the current period, up to a maximum amount of VAT credit on the balance sheet as of March 31st, 2019.
If the VAT credit in the current period exceeds the VAT credits as of March 31st, 2019 (if any), the extra portion of the balance is referred to as the Incremental VAT credits.
If the company was established after March 31st, 2019, 100% of the VAT credit will be counted as the incremental VAT credit.
Example:
The company has RMB 1.2 million in input VAT credits as of April 30th, 2022. However, the company only had a VAT credit balance of RMB 500k as of March 31st, 2019. The amount of Existing VAT credit is RMB 500k while the Incremental VAT credit is RMB 700k.
How to qualify for the VAT credit refund
The newly announced measures are available to Micro and Small-Sized Enterprises which are classified as follows:
Micro-sized enterprises – include enterprises with value-added tax sales below RMB 1 million within 12 consecutive months prior to applying for the refund
Small-sized enterprises – include enterprises with value-added tax sales below RMB 20 million within 12 consecutive months prior to applying for the refund
Medium-sized enterprises – include enterprises with value-added tax sales below RMB 100 million within 12 consecutive months prior to applying for the refund
Large-sized enterprises – include enterprises with value-added tax sales of RMB 100 million or above million within 12 consecutive months prior to applying for the refund
In order to qualify for the VAT credit refund, MSEs and enterprises engaged in manufacturing and other industries must meet the following additional requirements:
- The taxpayer’s credit rating must be at A or B level;
- In the 36 months prior to the application for the tax refund, there is no incident of fraudulently obtaining tax refunds for remaining credits, fraudulently obtaining export tax refunds, or falsely issuing special VAT invoices;
- The company has not been penalized twice or more by the tax authority for tax evasion in the 36 months prior to the application for the tax refund;
- The company has not utilized the refund upon collection or refund after collection policy from April 1, 2019.
The announcement also expands the VAT refund policy for medium- and large-sized enterprises engaged in manufacturing and other industries. These specific industries refer to:
- Scientific research and technical services;
- Electricity, heat, gas, and water production and supply;
- Software and information technology services;
- Ecological protection and environmental governance; and
- Transportation, warehousing, and postal industries.
How to apply for the uncredited VAT refund
Businesses should first examine whether they have VAT credits on their balance sheet and whether the amount is enough to warrant the effort of seeking a refund. Taxpayers looking to apply the policy should do so through the online tax portal corresponding to the tax district to which the company belongs.
Qualified MSEs can apply for the Existing VAT credit and Incremental VAT credit according to the table below. Notably, the VAT refund for MSEs is scheduled to expire on December 31st, 2022.
Please change below the Uncredited VAT Refund to VAT Credit Refund.
Qualified enterprises can apply simultaneously for the Existing tax credit and the Incremental tax credit provided they are applying in the tax period corresponding to the table above or later.
Micro- and Small-Sized Business have until December 31st to apply for the VAT refund. However, there is no stated deadline for enterprises carrying out manufacturing and other industries to apply for the refund and it is expected that the policy will continue into 2023.
Limitations of the One-Time VAT credit refund
Ultimately, the tax refund does not reduce the total VAT liability of the business but instead provides more tools to better manage the cash flow by shifting the tax payment to the time of final sale.
This negates the businesses’ ability to credit the VAT credit against future output VAT on sales. In other words, the business will face a net higher VAT payable in the future due to having less input VAT to offset its output VAT.
However, the policy can be a useful tool for businesses to better manage their cash flow. Businesses facing closures or losses of revenue due to the recent economic downturn can apply the policy to receive cash back provided they meet the requirements. Likewise, businesses that made or are planning large capital expenditures can free up some working capital to run the business.
For more information on the application for the VAT refund, please contact us for a free consultation.
