It is proposed in theReport on the Work of the Government that massive tax refund will be implemented for payable tax credits in 2022 on an estimated scale of 1.5 trillion RMB. Recently, the Ministry of Finance and the State Taxation Administration jointly deployed and implemented this initiative to ensure that taxpayers can enjoy such policy dividends in a timely manner. Among the overall amount of money, the first batch of transfer payments at 400 billion RMB to support small and micro enterprises as tax refund were issued on March 21st and will be distributed starting on April 1.
The generation of value-added tax (VAT) credits is related to how the VAT is calculated, which, in China, is done by tax deduction. First, the output tax and input tax are calculated separately, then the net amount (deducting the input tax from the output tax) will be used for the VAT to be paid by enterprises in current taxation period. According to provisional VAT regulations, if current output tax of an enterprise is less than its current input tax, the deductible part can be put off to the next taxation period for later calculation, which is commonly referred to as VAT credit or remaining tax.
Before 2018, China mainly adopted the practice of carrying forward the deduction at the end of a taxation period for counteracting the tax payable in the next taxation period, and only refunded the amount of tax retained due to specific matters for eligible taxpayers in some particular industries and sectors according to certain formula. In 2018, the VAT credits for advanced manufacturing like equipment manufacturing, and modern service industries such as R&D and power grid enterprises were refunded, but the scale was small and the coverage was narrow. In 2019, China initially established an institutional end-of-period tax refund system to give back incremental tax credits to general taxpayers in all industries eligible for this policy, and set more favorable tax refund conditions for some advanced manufacturing taxpayers. In 2021, the scope of advanced manufacturing was further broadened to include industries such as pharmaceuticals, chemical fiber textiles, railways, ships and boats, aerospace and other transportation facilities, electrical machinery and equipment as well as instrument manufacturing.
This year’s VAT refund has been significantly strengthened, which fully reflects the combination of phased measures and institutional arrangements. Specifically, this round of tax refund has the following features:
First, the policy is so strong that existing tax credits are to be thoroughly solved. In terms of scale, the tax refund has reached an unprecedented 1.5 trillion RMB. In 2018, the total amount of tax rebates for advanced manufacturing industries such as equipment manufacturing, modern service industries like R&D, and power grid enterprises stood only at 114.8 billion RMB. While the subsequent incremental tax refund policies have been extended to all industries, the scope only covered the incremental part compared with March 31st, 2019. Accumulative tax credits before this point will not be included in the policy, so the total scale of tax refund was relatively small. This year, China will further increase the implementation of the VAT refund policy at the end of taxation periods. Six industries will be involved, including manufacturing; scientific research and technical services; production and supply of electricity, heat, gas and water; software and information technology services; ecological protection and environmental governance; as well as transportation, storage and postal services. Eligible SMEs will not only receive tax refund for incremental VAT credits in full on a monthly basis, but also obtain the refund for total existing tax credits at one time. This will be of great importance for SMEs to ease their pressure on capital flow, to tide over the difficulties, to revitalize financing resources, to stimulate business vitality, and to further enhance the competitiveness of China’s manufacturing industry.
Second, the policy is highly targeted with a high speed. With regard to tax refunds, the Report on the Work of the Government proposes to give priority to SMEs, to focus on supporting the manufacturing industry, and to comprehensively solve the problem of accumulative tax refunds in certain industries such as manufacturing. On the basis of different impact by VAT tax rebates on enterprises with different scales and in different sectors, policies will be made in a targeted manner. This is sure to be conducive to the sustainable and stable operation of SMEs; to help enterprises in key fields to expand investment, improve craftsmanship and upgrade technical equipment; to promote high-quality development of the manufacturing industry and the corresponding provision of modernized industrial chains and supply chains; as well as to enhance their stability and competitiveness. The Ministry of Finance and the State Taxation Administration have made detailed policy arrangements for enterprises of all kinds and in several batches to carry out the tax refund.
Third, there will be strong financial guarantee for this policy by the central government. As the large-scale tax refund may put greater pressure on some regions with weak financial resources, the central government has arranged special transfer payment support for local governments to pay their share for the tax refund this year, particularly by giving preferential support for SMEs and county-level governments to ensure the full refund of tax credits.
After the implementation of this year’s large-scale tax refund, the incremental and existing tax credits for all eligible SMEs and enterprises from six industries mentioned above will be completely refunded. By returning real cash to enterprises, the government can directly provide capital flow to market entities for technological transformation and equipment renewal, which will help to effectively boost market confidence, stimulate the vitality of market entities, enhance home-grown economic driving force and foster new drivers for high-quality development.
(Author: Liu Yi, Professor at the School of Economics of Peking University )
