On December 31, 2008, the State Administration for Taxation (SAT) promulgated the Circular on Relevant Issues Regarding the Qualification of General Value-Added Tax Taxpayers (Guo Shui Han (2008) 1079, the Circular). The Circular took effect on January 1, 2009.  

Value-added tax (VAT) taxpayers are considered small-scale VAT taxpayers unless:

  1. Their annual sales volume exceeds a certain baseline amount;
  2. They have a sound accounting system; and
  3. Tax authorities approve their qualification as general VAT taxpayers.  

General VAT taxpayers may reduce their VAT burden by crediting input VAT against output VAT on a special VAT invoice.  

The need for this Circular arose because the newly-revised Implementation Rules for the Provisional Regulations on Value-Added Tax, effective as of January 1, 2009, the Implementation Rules) lowered the annual sales volume required for qualifying as a general VAT taxpayer (New Standard). As a result, some taxpayers who were previously considered small-scale may now qualify as general VAT taxpayers. SAT is currently drafting new measures to govern the qualification of general VAT taxpayers, but until such measures are promulgated (Transitional Period), the Circular addresses the qualification of VAT general taxpayers.  

The Circular sets forth the following principles that apply to the Transitional Period:

  1. Current regulations on the qualification of VAT general taxpayers will continue to be implemented;  
  1. If a small-scale taxpayer, whose annual sales amount for 2008 exceeds the New Standard, applies to the competent tax authority for recognition as a VAT general taxpayer, the authority will handle the application in accordance with current regulations;  
  1. If a small-scale taxpayer whose annual sales amount for 2009 exceeds the New Standard applies to the competent tax authority for recognition as a VAT general taxpayer, the taxpayer should adhere to the Provisional Regulations on Value-Added Tax and the Implementation Rules (together, the New VAT Regulations), and if the taxpayer fails to be confirmed as a VAT general taxpayer under the New VAT Regulations, then the taxpayer will not be able to claim any input VAT credit or use any VAT special invoices; and  
  1. Even if a small-scale taxpayer’s annual sales amount does not exceed the New Standard, the taxpayer may still, according to the current regulations, apply to the competent tax authority for qualification as a VAT general taxpayer.