ow does the turnover tax system in China operate?
Effective January 1, 1994, a turnover tax system consisting of value-added tax, consumption tax and business tax was introduced by the Chinese authorities. Value-added tax, consumption tax and business tax are indirect taxes charged on the gross turnover of businesses and enterprises operating in China.
Under the turnover tax system, FIEs will pay either value-added tax or business tax, depending on the nature of their businesses. Value-added tax is levied on the sales of tangible goods, provision of processing, repairs and replacement services and the importation of goods within PRC. The general value-added tax rate is 17% on products and imports and a lower rate of 13% is levied on certain specific products, mostly necessities.
Export sales are exempted under VAT rules and an exporter who incurs input VAT on purchase or manufacture of goods should be able to claim a refund from the tax authorities. However, due to a reduction in the VAT export refund rate of some goods, however, exporters might bear part of the VAT they incurred in conjunction with the exported goods.
Business tax is applicable to enterprises in the service, transport and other non-production industries as well as the transfer of tangible assets or immovable properties. Business tax rates range from 3% to 20%, depending on the category of the business concerned.
Consumption tax is levied on the production in China of 11 categories of goods including cigarettes, alcohol, cosmetics, jewellery, gasoline and motor vehicles. Importation of taxable goods is also subject to consumption tax but export is exempt.
Turnover tax paid, except for value-added tax, is deductible for foreign enterprise income tax purposes, because both business tax and consumption tax are considered as costs to the business or enterprise concerned. Value-added tax, however, is a tax, which is borne by the end-user of taxable products and services and would not be deductible for income tax purposes.