Features of the legal regulation of value added taxation in the field of small business of the People's Republic of China
The article offers an analysis of the current state of the legislation on value added taxation in relation to small businesses in China. The peculiarities of the formation of legal structures of VAT, developed in order to stimulate small enterprises, are highlighted. It is noted that in the context of declining economic growth and the spread of new viral pneumonia, the legislator and the tax authorities of the People's Republic of China provide a wide range of additional benefits in the legal mechanism of VAT for this category of taxpayers.
Keywords: the mechanism of legal regulation of VAT, tax benefits, tax deduction, VAT refund, small business.
Instead of relying entirely on a tax policy to support investments, the Chinese leadership is focusing its efforts towards institution-building <1>, developed on the basis of lifting a significant part of the Chinese population out of poverty and fully encouraging the growth of household disposable incomes <2>.
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<1> Shahid Yu. The economics of development through the decades. A critical look at 30 years of preparation of World Development Reports. M., 2012. p. 70.
<2> Spence M. The next convergence: the future of economic growth in a world living at different speeds. M., 2013. p. 241.
The Chinese leadership is taking the first steps in this direction in rural areas, taking advantage of the fact that side employment in the manufacture of various goods is traditionally a common practice, which is also adopted by collective farms.
After Deng Xiaoping's reforms began in 1978, local party leaders began to promote the creation of township-township enterprises (PVP), which gradually filled the shortage of goods in the consumer market. The active development of PVP is facilitated by the low cost of attracting labor resources and minimal capital investments within the framework of those technologies that allow them to successfully compete in the commodity markets for a long time. In the period 1978 - 1996, employment in the PVP increased from 28 to 135 million people. The share of the created product of these organizations in the GDP of the People's Republic of China increases from 6% to 26% <3>.
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<3> Allen R. Global Economic History: A Brief introduction. M., 2013. p. 209.
By 2004, 75% of toys, 29% of mobile phones and 58% of clothing in the world were produced in China <4> on a production base developed in conditions of maintaining minimal financial and economic costs and tax incentives for economic entities.
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<4> Shapiro R. Forecast for the future. M., 2009. p. 235.
For the purposes of economic development, the entire system of taxation of small businesses is being actively modernized. A number of measures are being taken for this group of taxpayers in the field of VAT legal regulation, the most important of which is the abolition of the multiple range of VAT rates from July 1, 2014 (6%, 4%, 3%) and the transition of this group of tax payers to a single unified rate of 3%.
This step is a fairly clear illustration of how fundamental the issue of mass entrepreneurship is in the context of the development of the tax and welfare state <5> in the PRC.
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<5> Piketty T. Capital in the XXI century. M., 2015. p. 493.
Implementing the decisions of the CPC Central Committee and the State Council of the People's Republic of China on innovation support aimed at promoting preferences for entrepreneurship, the State Tax Administration of the People's Republic of China in April 2017 adopted a special Guide on preferential taxation policy for mass entrepreneurship and innovation, which includes 89 preferential tax policies and measures in key areas of the economy. The proposed measures cover the entire life cycle of the enterprise and contain a description of preferential positions. In particular, these include a large-scale exemption from VAT for taxpayers by increasing the VAT threshold from 30,000 yuan to 100,000 yuan of monthly sales <6>.
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<6> Regulation of the State Tax Administration of the People's Republic of China on the collection and management of small taxpayers exempt from the value added tax policy: Announcement of the State Administration for Value Added Taxation No. 4 dated March 1, 2019
It is significant that the most important component of the implementation of the decisions of the XIX Congress of the CPC in the field of taxation is the definition of one hundred and ten preferential policies to help combat poverty, of which thirty-six directions involve specific measures to reduce or completely eliminate VAT.
The correction of the legal mechanism of VAT has been carried out in such a way as to cover almost all problem areas affecting the way out of poverty (infrastructure, employment, support for small and associated agricultural producers): construction of infrastructure in poor areas; ensuring the safety of drinking water; ensuring conditions for the sale of agricultural products of own production; transfer of land to agricultural producers for agricultural production; promotion of inclusive financing of agricultural producers; encouraging social donations to fight poverty.
In particular, this is reflected in the definition of the following specific measures <7>:
exemption from VAT of fees for the maintenance of rural power grids (2);
exemption from VAT of projects in rural areas to ensure the safety of drinking water (11);
VAT exemption for the transfer of land use rights to agricultural enterprises exempt from value added tax (16);
exemption from VAT on the contractual transfer of land to agricultural producers for agricultural production (17);
VAT exemption for the sale of agricultural products of own production (23);
VAT exemption for imports of corn bran, rice bran and other feed (25);
VAT exemption for bulk feed in domestic turnover (26);
VAT exemption for the production and sale of organic fertilizers (27);
VAT exemption for drip irrigation products (28);
VAT exemption for the production and sale of agricultural film (29);
VAT exemption for wholesale and retail sales of seeds, seedlings, pesticides, agricultural machinery (30);
recognition of the right to deduct input VAT (32);
VAT exemption of the "company + farmers" business model for the sale of livestock and poultry (39);
VAT exemption for sales of agricultural products by professional farmers' cooperatives (41);
VAT exemption for sales of agricultural materials by professional farmers' cooperatives (42);
VAT exemption for vegetables (45);
VAT exemption for the turnover of some live meat and egg products (46);
full (100%) VAT refund for the production of fuel and electricity from agricultural and forest residues as raw materials (50);
70% VAT refund in the integrated use of excess raw materials of agricultural and forest products for the production of resources (51);
70% VAT refund for the production of biodiesel from animal and vegetable oil waste (52);
50% VAT exemption for the production of pulp and paper from straw raw materials (53);
allocation of sales quotas to exempt small taxpayers from VAT (57);
exemption of small taxpayers, together with VAT, from "six local taxes and fees" (59);
VAT exemption for persons with disabilities (63);
VAT refund for households engaged in employment of persons with disabilities (64);
VAT refund to special education enterprises working in schools for the employment of persons with disabilities (65);
VAT exemption of interest income of financial institutions on loans to farmers (69);
VAT exemption of interest income of financial institutions for micro-crediting of small and microenterprises, individual industrial and commercial households (70);
enabling the use of simple VAT methods in the provision of financial services by rural credit cooperatives (73);
enabling the application of the simple VAT method to interest income on loans from the Chinese Financial Bank of Sannong related to agriculture (75);
VAT exemption of interest income on loans from a micro-credit company to farm households (77);
VAT exemption for financing guarantees for farm households, small and microenterprises, as well as re-guaranteeing businesses (80);
insurance of agricultural and livestock businesses is exempt from value added tax (82);
preferential VAT taxation policy for ethnic and economically weak areas of Xinjiang (Xinjiang International Grand Bazaar) (93);
VAT exemption for charitable foreign donations (108);
VAT exemption of goods for poverty reduction (110).
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<7> The numbering from the general list of tax policies is marked in parentheses.
At the same time, the Chinese leadership is working to expand the range of incentive measures, continuing to initiate "targeted" incentives for the development of agriculture and support for the poorest part of the population. These include the announcement dated August 28, 2019, No. 83 <8>, the first paragraph of which establishes VAT exemption for tea production enterprises selling their own tea, as well as sales of tea by distribution companies.
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<8> Announcement of the Ministry of Finance of the People's Republic of China and the State Tax Administration of the People's Republic of China dated August 28, 2019 No. 83 "On the continuation of the implementation of the value-added tax policy.
Among the significant areas of reforming the legal regulation of value added taxation, of course, is the policy of including small businesses in the chains of division of labor of VAT payers.
In order to harmonize standards for small taxpayers, the State Tax Administration of the People's Republic of China announces the criteria and registration procedure for such a group of VAT payers, adopting an interconnected set of clarifying regulations in 2018. <9>
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<9> Bulletin of the State Tax Service dated April 20, 2018 No. 18 on the issues of a single standard for small value added tax payers; Bulletin of the State Tax Administration dated April 22, 2018 No. 20 "On approval of a single standard for small taxpayers on the issue of refund (exemption) of export tax"; Announcement dated April 25 2018 "On decoding the bulletin of the State Tax Service on the unified standard for small taxpayers on the issue of refund (exemption) of export tax".
According to them, taxpayers can continue to work as general taxpayers or register as small taxpayers. To register as a general taxpayer, it is necessary to: (1) comply with the provisions of Articles 13 and 28 of the Provisional VAT Regulations of the People's Republic of China; (2) that the amount of taxable sales does not exceed 5 million yuan, calculated for 12 consecutive months prior to the date of filing the registration application.
After the general taxpayer is transferred to the status of a small taxpayer, value added tax begins to be calculated in accordance with the simplified taxation method, starting from the next period after the registration date.
The deduction of VAT from taxpayers is made by reducing the tax to be paid to the budget. If the deductible amount exceeds the amount of tax payable, the remaining VAT is subject to transfer to the next tax period.
In accordance with paragraph 1 of the Circular of the State Tax Administration of the People's Republic of China No. 243 dated August 31, 2019 "On the implementation of the second series of new measures to collect tax payments" <10> for this category of economic entities, the possibility of issuing special VAT invoices and voluntary use of the VAT invoice management system is provided. An analysis of the regulatory legal acts of the People's Republic of China shows that in this way small business entities paying VAT at a reduced rate (Table. 1), are entitled to issue their own invoices. In this case, the applicable VAT rates are set at the following rate:
3% - the basic VAT rate for small businesses;
5% is the VAT rate for special circumstances (sale and lease, real estate, transfer of land use rights, provision of labor dispatch services, security services);
in two special cases, a reduction of 3% and 5% is provided: (1) for individual rental housing, the taxable amount is calculated at a rate of 3.5% (5% minus 1.5%); (2) the sale of fixed assets and used goods is calculated at the rate of 2% (3% minus 1%).
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<10>
Table 1
Application of reduced VAT rates in China (3%, 5%) as of January 1, 2020
Tax position VAT rate, %
Ground transportation 3%
Water transport 3%
Air transport services 3%
Pipeline transport 3%
Universal postal service 3%
Postal Special Service 3%
Other postal services 3%
Basic telecommunications service 3%
Value-added communication services 3%
Engineering services 3%
Installation service 3%
Repair service 3%
Finishing works 3%
Other construction services 3%
Credit service 3%
Direct payment for financial services 3%
Insurance service 3%
Financial commodity transfer 3%
R&D and technical services 3%
Information Technology Service 3%
Cultural and creative services 3%
Logistics Support Service 3%
Movable property leasing service 3%
Real estate leasing services 5%
Forensic consulting services 3%
Radio and video services 3%
Business Support Service 3%
Other modern services 3%
Cultural and sports service 3%
Educational Medical Service 3%
Travel and entertainment services 3%
Catering service 3%
Daily maintenance of residents 3%
Other life services 3%
Sale of intangible assets 3%
Transfer of land use rights 5%
Sale of real estate 5%
Sale or import of goods 3%
Edible, edible vegetable oil 3%
Tap water, heating, air conditioning, hot water, gas, liquefied petroleum gas, natural gas, biogas, household coal products 3%
Books, newspapers, magazines 3%
Feed, fertilizers, pesticides, agricultural machinery, agricultural film 3%
Agricultural products 3%
Audiovisual products 3%
Electronic publication 3%
Dimethyl ether 3%
Other goods provided for by the State Council 3%
Processing, repair and repair services 3%
General taxpayers provide construction services using a simple tax calculation method 3%
Small taxpayers transfer purchased real estate 5%
Private transfer of the house they purchased 5%
An ordinary taxpayer at a development company sells old projects of his own real estate and chooses a simple method of calculating tax 5%
Small taxpayers in development companies selling independent real estate projects 5%
An ordinary taxpayer rents real estate acquired before April 30, 2016. 5%
Facilities and individual industrial and commercial households rent real estate 5%
Other persons renting real estate (rental housing minus 1.5% of the taxable amount) 5%
(3,5%)
An ordinary taxpayer transfers real estate purchased before April 30, 2016. 5%
of vehicle parking services, motorway access services outside the expressway (including tolls, bridge tolls, tolls, etc.) 5%
Used goods 2%
As a result, small entrepreneurs receive a previously missing "entrance ticket", which improves the competitive capabilities of small businesses, since this allows its counterparties to refund VAT.
In March 2019, in a report at the session of the National People's Congress, Premier of the State Council of the People's Republic of China Li Keqiang stated his intention to "keep his mission firmly, stimulating the energy of small enterprises for high-quality economic development." In practical tax policy, this means reducing the fiscal payments of enterprises in 2019 by 2 trillion yuan (291 billion US dollars), of which only in the first five months of 2019. for small and medium-sized enterprises, which account for more than 99% of registered commercial organizations, the tax burden has been reduced by 816.8 billion yuan (119 billion US dollars).
In addition, it should be noted that after raising the VAT threshold from 30,000 yuan to 100,000 yuan per month, 29.4 million small entrepreneurs receive additional opportunities to develop their business in the form of VAT exemptions, which amounted to 49.8 billion yuan in January - April 2019 <11>.
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<11> Over 111 billion yuan of tax reduction realized in the first month of deepening VAT reform.
The legislation of the People's Republic of China, ensuring the targeted integration of small businesses into the chains of division of labor of VAT payers, forms a set of legal regulation measures: (1) the introduction of a special VAT rate of 3% for this category of entrepreneurs; (2) the establishment of the possibility of issuing their own VAT invoices; (3) Voluntary use of the VAT invoice management system; (4) Application of tax deduction procedures.
The special measures taken by the leadership of the People's Republic of China in connection with the spread of new viral pneumonia include a whole package of norms providing additional benefits in the legal mechanism of VAT for small businesses.
The threshold of 5 million yuan for registration of organizations and individual entrepreneurs as small VAT payers is confirmed <12>.
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<12> Bulletin of the State Tax Service Administration dated April 23, 2020 No. 9 "Announcement on a number of issues related to the collection of VAT, such as the sale of used cars."
From January 1, 2020, taxpayers who provide public transport services, household services, as well as those who receive income from providing express delivery services and accommodation services to the population are exempt from value-added tax <13>.
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<13> Bulletin of the State Tax Administration of the People's Republic of China dated February 6, 2020 No. 8 "On tax policy in the field of prevention and control of the epidemic of pneumonia caused by a new coronavirus infection".
From March 1 to May 31, 2020, the special VAT rate for individual entrepreneurs and microenterprises is reduced from 3% to 1% <14>, and in some territories, in particular in Hubei Province, such taxpayers are completely exempt from paying tax.
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<14> Bulletin of the State Tax Administration dated February 29, 2020 No. 5 "On support for individual entrepreneurs engaged in business restoration and other tax collection management surveys".
The value of sales, including value added tax, levied at a rate of 1%, is calculated using the following formula: sales value = sales including taxes without VAT x (1 + 0.01).
In order to facilitate the consumer turnover of old cars, from May 1, 2020 to December 31, 2023, taxation at a rate of 0.5% <15> is applied. It acts instead of the previously applied 2% rate, which was used as an exception to tax the turnover of used goods. The application of this measure not only further stimulates the business activity of small businesses, but also removes the problem of VAT evasion through the use of car resale schemes involving individuals.
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<15> Bulletin of the State Tax Administration dated April 23, 2020 No. 9 "Announcement on a number of issues related to the collection of VAT, such as the sale of used cars."
The actual result of the application of preferential practices is expressed not only in the formal simplification of VAT calculation and payment procedures, but also in a significant reduction in the overall tax burden of small businesses. According to the results of the period of the second quarter of 2019 - the first quarter of 2020, the decrease in its budget revenues in the total reduction of fiscal payments to enterprises of the People's Republic of China is 40%.
The data obtained, in our opinion, allow us to conclude that the successive changes in the legal mechanism of VAT, developed for small businesses, are another example of flexibility and real pragmatism manifested in the process of socio-economic development of China <16>.
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<16> Kinj D. China, which shook the world. M., 2008. p. 351.
The comprehensive use of financial instruments, combined with the soft rules of the modern fiscal policy of the Chinese state, makes it possible to effectively support the production activities of hundreds of thousands of entrepreneurs, encouraging them to expand their business and increase its economic returns.