What is a Value Added Tax?

Value-added tax is a turnover tax that is levied on the value-added generated during the circulation of goods (including taxable services) as a basis for tax calculation. From the principle of tax calculation, value-added tax is a turnover tax levied on the added value or added value of goods in multiple links in the production, distribution and labor services of goods. Extra-value tax is implemented, that is, borne by consumers. Taxes are levied only when they add value.

VAT is generated during the circulation of goods (including taxable services).

In practice, it is difficult to accurately calculate the added value or added value of a commodity in the production and distribution process. Therefore, China also adopts the tax deduction method that is generally used internationally. That is, based on the sales of goods or services, the sales tax is calculated at the prescribed tax rate, and then the value-added tax paid for obtaining the goods or services is deducted, which is the input tax. The difference is the tax payable on the value-added part. This calculation method reflects the principle of taxation based on value-added factors.

VAT levy usually includes all links in the production, distribution or consumption process. It is a neutral tax based on the value-added amount or spread as the basis for tax calculation. Theoretically, it includes various agricultural industries (planting, forestry, animal husbandry), and mining. , Manufacturing, construction, transportation, and commercial services, or procurement, manufacturing, wholesale, retail, and consumption of raw materials.

A sales tax, a regressive tax, is an indirect tax that is levied based on the value of goods or services. For consumption tax. VAT was invented by French economist Maurice Lauré in 1954, and 45% of the French government's revenue comes from VAT.

The scope of business tax to value-added tax is as follows:

I. scope of collection

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VAT is exempted if the sales of taxable services provided by individuals do not reach the threshold of VAT; if the threshold is reached, VAT is calculated and paid in full. VAT thresholds are not applicable to those identified as general taxpayers

VAT invoices are divided into:

VAT

China has implemented VAT on a trial basis since 1979, and carried out three important reforms in 1984, 1993 and 2012. The current value-added tax system is the State Council Decree No. 134 issued by the State Council on December 13, 1993.

National People's Congress

Decision on the Provisional Regulations on the Application of Taxes on Value Added Tax, Consumption Tax and Business Tax by Foreign-invested Enterprises and Foreign Enterprises

The difference between VAT and consumption tax is that VAT is levied on the value-added portion of each business link, while consumption tax is only levied on the final sales to consumers.

Example: Suppose a good is produced and sold.

1. No consumption tax

The manufacturer spent $ 1.00 on raw materials and produced one item.

The seller sold the item to a retailer for $ 1.20 and made a profit of $ 0.20

The retailer sold the item to the consumer for $ 1.50 and made a profit of $ 0.30

2. American-style consumption tax

Assume local levy of 10%

The Ministry of Finance and the State Administration of Taxation issued the "Notice on the Consolidation of Related Policies on VAT Rates". From July 1, 2017, the VAT rate structure was condensed, the 13% VAT rate was cancelled, and the applicable 11% rate The scope of the goods and the input tax deduction. ^[22] Starting from May 1, 2018, the VAT rate for manufacturing and other industries will be reduced from 17% to 16%, and the VAT rate for goods such as transportation, construction, basic telecommunications services and agricultural products will be reduced from 11% Down to 10%. ^[7-8]

According to the "Announcement on Deepening VAT Reform Related Policies" implemented from April 1, 2019, if the general VAT taxpayer has engaged in VAT taxable sales activities or imported goods, the original 16% tax rate will apply, and the tax rate will be adjusted to 13% ; Where the 10% tax rate was originally applicable, the tax rate was adjusted to 9% ^[23] .