7. The New VAT Rules
The Interim Regulation on the People’s Republic of China on Value Added Tax was recently amended will come into effect on 1 January 2009 (the “New VAT Rules”). According to article 1 of the New VAT Rules, all entities and individuals who are engaged in “the sale of goods, supply of processing, repair and replacement services, and import of goods within the territory of the People’s Republic of China” shall pay VAT in accordance with the New VAT Rules. Changes in the New VAT Rules are as follows:
(a) Input VAT to be deducted from the payable tax amount
Under the New VAT Rules, the VAT amount payable shall be the total sales amount of the current period times the VAT rate deducting the input VAT. If the VAT amount payable is less than the input VAT, the difference shall be carried forward to the following period for deduction.
(b) Tax exemption on imported equipment removed
Before the New VAT Rules come into effect, VAT is exempted for imported equipments and there are VAT refunds for certain foreign-invested enterprises on their purchase of domestically produced equipment.
Furthermore, foreign investments in China are classified as “encouraged”, “permitted”, “restricted”, and “forbidden” under the foreign investment catalogue. If a foreign-invested enterprise is classified as “encouraged”, the enterprise is eligible for VAT exemption on imported equipment for its own use up to its approved amount of total investment, unless the imported item is being regarded as non-exempted items. If an “encouraged” foreign-invested enterprise purchased equipment produced domestically within China, the enterprise could claim a VAT refund for the input VAT incurred on the purchase of such equipment.
With effect from 1 January 2009 pursuant to the New VAT Rules, the above preferential VAT policy will be abolished.