The Tax System in China has undergone tremendous changes in recent years. Currently, there are 24 different types of tax imposed on a wide range of incomes and transactions. Taxpayers can be individuals, entities or economic organizations. To fulfill its WTO commitments, the Chinese government is currently preparing for another round of tax reform, which is expected to take place in 2009. The goals of this reform are to unify current tax laws and to develop a level playing field for domestic enterprises and foreign investment enterprises, to promote the harmonized growth of taxation and the economy, and to improve the efficiency of tax collection and administration.
China Tax Overview
As far as China tax department is concerned, China has two functional taxes: national tax and local tax, the former is for national use while the later is for local use.
Tax Return must claim Value Added Tax, Business Tax, Individual Income Tax monthly and Enterprise Income Tax quarterly for the registered sectors to the national or local taxation. Enterprise Income Tax needs to claim final settlement and payment yearly.
The main tax Category to the national taxation is Value Added Tax; Consumption Tax by customs, Enterprise Income Tax, and to the local taxation is Business Tax, Individual Income Tax, Resource Tax, City Maintenance and Construction Tax, House Property Tax, Stamp Duty, Urban and Township Land Use Tax.
Value Added Tax (VAT) is 0-17% for trading and manufacturing sectors; Business Tax (BT) is 3-20% for service sectors, Enterprise Income Tax (EIT) is 25%, and Individual Income Tax (IIT) is 5-45%.
China Tax Category
The China tax could be classified as follows: Value Added Tax (VAT), Business Tax (BT), Enterprise Income Tax (EIT), Individual Income Tax (IIT), Consumption Tax by customs (CT), Resource Tax (RT), City Maintenance and Construction Tax (CMCT), House Property Tax (HPT), Stamp Duty (ST), Urban and Township Land Use Tax (UTLU)
Value Added Tax (VAT)
VAT is levied at a general rate of 17 per cent on all units and individuals engaged in the sale of goods; the provision of processing , repairs and replacement services; and the importation of goods into China. A special rate of 13 percent applies to certain items, such as utilities, cereals and edible vegetable oils, animal feed, fertilizers and insecticides. Exported goods are generally zero-rated, but some exceptions apply.
According to the companies of different sizes，the companies can be divided into normal taxpayers and small taxpayers:
To compute the VAT payable, the normal taxpayers need to separately calculate the output tax and the input tax for the current period. Then the difference between the output tax and the input tax shall be the actual amount of VAT payable.
The formula for computing the tax payable is as follows:
Tax payable = Output tax payable for the current period - Input tax for the current period
Output tax payable = Sales volume in the current period × Applicable tax rate
Small taxpayers are taxed on the basis of the revenue derived from sales of goods or provision of taxable services by applying proper rates (4% for commercial sector, and 6% for other sectors). The computing formula is:
Tax payable = Sales amount × Applicable rate
The imported goods are taxed on the basis of the composite assessable price by applying the applicable tax rate.
4）VAT refund for exporters
In case of 0% rate applicable to the exported goods, the exporters may apply to the tax authorities for the input tax refund on those goods exported. At present, the refund rates consist of 5%, 6%, 9%, 11%, 13% and 17%.
The exempted items include: self-produced primary agricultural products sold by agricultural producing units and individuals; imported goods being processed for exportation; the self-use equipment imported out of the total investment for the projects with foreign investment or domestic investment which are encouraged by the State; contraceptive medicines and devices; antique books purchased from the public; instruments and equipment imported for direct use in scientific research, experiment and education; imported materials and equipment granted by foreign governments or international organizations; articles imported directly by organizations for the disabled for exclusive use by the disabled.
Business Tax (BT)
Business tax ranging form 3 percent to 20 percent is levied on various types of services provided, and on the transfer of intangible assets or the sale of immovable properties within China. Transportation, construction, post and telecommunication, cultural activities and sports are taxed at 3 percent, while the financial and insurance industries and most services are taxed at 5 percent. The entertainment business, including operation of music halls, ballrooms, karaoke, billiard rooms, golf courses, bowling alleys, recreation rooms and internet cafes, is taxed at between 5percent and 20 percent. Business tax is imposed on gross receipts, including additional fees and charges. Certain services, such as educational, nursing, medical, cultural and agricultural development services, are exempt. The transfer of intangible assets or the sale of immovable properties is subject to business tax of 5percent.
The amount of Business Tax payable is equal to the turnover times the applicable tax rate. The computing formula is:
Tax payable = Turnover × Applicable tax rate
Business Tax may be exempt for: nursing services provided by nurseries, kindergartens, old people's homes, welfare institutions for the handicapped, matchmaking and funeral services; services provided individually by the disabled to the public; medical services provided by hospitals, clinics and other medical institutions; educational services provided by schools and other educational institutions, and services provided by students in part-time work; agricultural mechanical ploughing, irrigation and drainage, prevention and treatment of plant diseases and insect pests, plant protection, insurance for farming and animal husbandry, and related technical training services, breeding and the prevention and treatment of diseases of poultry, livestock and aquatic animals; admission fees for cultural activities conducted by memorial hall, museum, cultural centre, art gallery, exhibition hall, academy of painting and calligraphy, library and cultural protective units, admission fees for cultural and religious activities taking place at religious premises.
Enterprise Income Tax (EIT)
The Enterprise Income Tax is computed on the basis of the taxable income which is equal to the total income earned by the taxpayers in a tax year less allowable deductions for the same tax year.
Normally, the amount of Enterprise Income Tax payable is computed on the basis of the taxable income and by applying the rate of 25%. The formula for computing the tax payable is:
Income tax payable= Taxable income × 25%
Individual Income Tax (IIT)
The Individual Income Tax Law, Individual Income Tax Implementing Rules and the tax circulars issued by various levels of tax administration form the prevailing legal basis of individual income tax (IIT) in China.
Consumption Tax (CT)
Consumption tax is levied on units and individuals engaged in the manufacturing, processing and importation of specific non-essential or luxury goods, such as tobacco, alcohol, cosmetics, jewellery and automobiles. Tax rates range from 3 percent to 5 percent.
Resource Tax (RT)
Resource Tax applies to all units and individuals engaged in the exploitation of mineral resources or production of salt prescribed
City Maintenance and Construction Tax (CMCT)
The enterprises of any nature, units, individual household businesses and other individuals (excluding enterprises with foreign investment, foreign enterprises and foreigners) who are obliged to pay Value Added Tax, consumption Tax and/or Business Tax are the taxpayers of City Maintenance and Construction Tax.
Differential rates are adopted: 7% rate for city area, 5% rate for county and township area and 1% rate for other area.
House Property Tax (HPT)
House Property Tax is levied in cities, county capitals, townships and industrial and mining districts. Taxpayers are owners of house property, operational and managerial units of house property, mortgagees, custodians and users of house property
Stamp Duty (ST)
All enterprises or individuals executing or obtaining certain types of document must pay stamp duty. Such as documents include sales and purchase contracts, lease or rental contracts, loan contracts, documents relating to the transfer of property, business account books, certification of rights of licenses an other documents specified by the Ministry of Finance. Stamp duty is assessed on the contracting parties at rates ranging from 0.005 percent to 0.1 percent.
Urban and Township Land Use Tax (UTLU)
Urban real estate tax applies to owners of land and buildings in urban areas, primarily FIEs. The tax is levied on the net book value of the property as determined by a local real estate appraisal committee. For an owner-occupied building, the rate is 1.2 percent a year on the building’s net book value. If the owner leases out the building, tax is levied instead at a rate of 12 percent on the rentals pan. The tax is payable in quarterly or semi annual installments, as determined by the local tax authorities.
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