China’s State Council recently amended the Interim Regulations on Consumption Tax of the PRC, which took effect on January 1, 2009, along with the amended regulations on value-added tax and business tax.
According to statements by competent authorities, the Revised Regulations incorporate and integrate various tax policies that have been promulgated by relevant ministries since 1994. In order to be consistent with the amended value-added tax regulations, the Revised Regulations extend the declaration period and specify the declaration location for consumption taxpayers.
The predecessor to the Revised Regulations (the Old Regulations) was promulgated in 1993. Like the Old Regulations, the Revised Regulations state that consumption taxpayers include all enterprises and individuals that produce, process upon commission or import taxable consumption goods within the territory of the PRC. In addition, the Revised Regulations provide that the State Council may deem other enterprises and individuals to be consumption taxpayers. Under both regulations, exported taxable consumption goods are exempted from consumption tax unless otherwise provided by the State Council.
In addition, the Revised Regulations maintain that consumption tax is payable at different times depending on the nature of the taxable consumption goods. For goods produced by the taxpayer, the consumption tax will be paid by the taxpayer at the time of sale; for goods processed upon commission, it will be collected and remitted by the commissioned party at the time when such goods are delivered to the commissioning party, unless the commissioned party is an individual; and for imported goods, the tax will be paid upon import declaration with customs.
The Revised Regulations introduce a new method of calculating the consumption tax payable. Under the Old Regulations, one of two formulas was used to calculate it: the ad valorem formula, which involves multiplying the sales revenue by the proportional tax rate, or the specific tax formula, which involves multiplying the quantity of sales by the tax amount per unit. The Revised Regulations, however, include a third method, which combines the ad valorem formula and the specific tax formula (the Composite Method). For the Composite Method, the consumption tax payable equals the sales revenue multiplied by the proportional tax rate plus the quantity of sales multiplied by the tax amount per unit. The Composite Method is used to calculate the composite taxable value for consumption goods for which the sale price of similar goods is not available. Since 2001, circulars issued by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) have applied the Composite Method to the calculation of consumption tax payable on cigarettes and white spirits. Now, however, the Composite Method is included in the State Council’s Revised Regulations, which has a higher level of authority than the previously issued circulars.
Consistent with the amended value-added tax regulations, the Revised Regulations add a quarterly payment interval for consumption tax, in addition to the one-, three-, five-, 10-, 15-day, and onemonth intervals provided in the Old Regulations. Taxpayers who pay consumption tax on a one-, three-, five-, ten- or fifteen-day basis must prepay the consumption tax payable within five days after the interval ends, and then file tax returns and settle the consumption tax payable for the past month within the first 15 days of the following month. Taxpayers who pay consumption tax on a monthly or quarterly basis must file their tax returns within 15 days after the interval ends, instead of 10 days as prescribed in the Old Regulations. Similarly, taxpayers who import taxable consumption goods must pay the consumption tax payable within 15 days from the date when customs issues a special consumption tax invoice for the imported goods, instead of seven days.
The Revised Regulations incorporate the Circular on Adjusting and Perfecting Consumption Tax Policies issued in March 2006 by MOF and SAT (the Circular). Under the Circular, disposable wooden chopsticks, golf balls and equipment, luxury watches, yachts and solid wood flooring were added to the list of taxable consumption goods. In addition, the Revised Regulations include other adjustments to the list of consumption tax items and rates, such as a higher tax rate for small cars with high emissions. Such adjustments indicate the preferential tax treatment given to consumption goods that save energy or protect the environment, and reflect the State’s intention to steer the consumption market and adjust its product structure.