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Circular of Ministry of Finance and The State Administration of Taxation relating to Printing and Distributing the Interim Measures for Expanding the Scope of Offset for Value Added Tax in the Central Region Cai Shui [2007] No.75 The provincial finance departments and state taxation bureaus of Shanxi, Anhui, Jiangxi, Henan, Hubei, and Hunan Provinces: The Interim Measures for Expanding the Scope of Offset for the Value Added Tax in the Central Region, which were formulated by the Ministry of Finance and the State Administration of Taxation according to the provisions in the Several Opinions of the Central Committee of the Communist Party of China (CCCPC) and the State Council on promoting the Rise of the Central Region (Zhong Fa [2006] No. 10) regarding the transformation of the value added tax of the production type into one of consumption type in the Central Region as well as the scope as determined in the Circular of the General Office of the State Council about Implementing by Analogy in the Six Provinces of the Central Region the Relevant Polices on Revitalization of the Northeastern Region and Other Old Industrial Bases and Promoting the Development of the Western Region (Guo Ban Han[2007] No. 2), are hereby printed and distributed to you, please comply with them. In order to choose some industries in 26 cities of the old industrial bases in the Central Region as pilots where the scope of Offset for the value added tax is expanded is not only a significant measure which is taken by the Central Government for boosting the rise of the Central Region, but also a measure to accumulate experiences for reforming the value added tax system throughout the country in the future. The finance and tax departments of the pilot regions shall strengthen their leadership, carefully organize the implementation the present Measures, exchange information with each other and via the provincial state taxation bureaus every half a year, timely report the data relevant to the expansion of the scope of Offset for value added tax to the provincial finance departments. If there is any problem during the implementation of the present Measures, please report it to your superior organ in time. The Ministry of Finance The State Administration of Taxation May 11, 2007 Appendix: Interim Measures for Expanding the Scope of Offset for the Value Added Tax in the Central Region 1. The present Measures are formulated according to Several Opinions of the Central Committee of the Communist Party of China (CCCPC) and the State Council on promoting the Rise of Central Region (Zhong Fa [2006] No. 10) as well as Circular of the General Office of the State Council relating to Implementing by Analogy in Six Provinces of the Central Region the Relevant Polices on Revitalization of the Northeastern Region and Other Old Industrial Bases and Promoting the Development of the Western Region (Guo Ban Han [2007] No. 2). 2. The present Measures shall apply to the general taxpayers (hereinafter referred to as the taxpayers) of value added tax who mainly engage in the equipment manufacturing industry, petrochemical industry, metallurgy industry, auto manufacturing industry, agricultural product processing industry, electric power industry, mining industry, as well as high and new tech industry. The cities of the old industrial bases of the six provinces in the Central Region which are mentioned in this Article refer to Taiyuan, Datong, Yangquan and Changzhi of Shanxi Province; Hefei, Ma'anshan, Bengbu, Wuhu and Huainan of Anhui Province; Nanchang, Pingxiang, Jingdezhen and Jiujiang of Jiangxi Province; Zhengzhou, Luoyang, Jiaozuo, Pingdingshan and Kaifeng of Henan Province; Wuhan, Huangshi, Xiangfan and Shiyan of Hubei Province and Changsha, Zhuzhou, Xiangtan and Hengyang of Hunan Province. The boundaries of aforesaid cities shall be on the basis of the administrative divisions. The term "mainly engage in …" as mentioned in this Article refers to the taxpayers whose annual sales amount in the equipment manufacturing industry, petrochemical industry, metallurgy industry, auto manufacturing industry, agricultural project processing industry, mining industry, electric power industry, as well as high and new tech industry accounts for at least 50% in its total sales amount during the same period. See Appendix for the scope of concrete industries. 3. The input tax amounts for the following items of a taxpayer may be deducted in accordance with Article 5: (1) The fixed assets purchased (including donations accepted and investments in kind, the same hereinafter ); (2) The goods purchased or VAT taxable services for self-producing (including expansion, installation, the same hereinafter) fixed assets; (3) The fixed assets which is obtained by financial lease, where the lessor has paid VAT according to the Circular of the State Administration of Taxation about Levying Turnover Taxes on the Financial Lease Business (Guo Shui Han [2000] No. 514); and (4) The transport expenses which is paid for fixed assets. The term "input tax amounts" which is mentioned in this Article refers to the input tax amount which is actually incurred by a taxpayer as of July 1, 2007 and for which special VAT invoices, transport invoices, customs import VAT payment certificates as well as other lawful tax payment vouchers issued as of July 1, 2007 have been obtained. 4. The term "fixed assets" which is mentioned in the present Measures refers to the fixed assets as prescribed in Article 19 of the Detailed Rules for the Implementation of the Interim Regulation of the People's Republic of China on Value Added Tax. The scope of Offset which is mentioned in the present Measures does not include the real properties purchased or self-produced by taxpayers. 5. The input tax amounts which are listed in Article 3 of the present Measures which may be offset by a taxpayer during the current year may not exceed the VAT amount newly increased during the current year in general. If no new VAT amount is increased or if the VAT amount newly increased is not enough to be offset, it shall carry forward the input tax amounts which have not been offset to the next year for being offset. If a taxpayer has any outstanding VAT amount prior to July 1, 2007, no matter whether or not it has any VAT amount newly increased, it shall first offset the outstanding tax amount. If a small-scale taxpayer is recognized as a general taxpayer, it shall adopt the payable VAT incurred during the same period of the previous year, during which it was a small-scale taxpayer, as the base for calculating the VAT amount newly increased. The VAT amount newly increased during the current year, which is mentioned in this Article, refers to the portion of payable VAT incurred during the current year that exceeds the payable VAT incurred during the previous year. 6. It shall refund the input tax amounts of a taxpayer incurred for fixed assets on a quarterly basis and settle by the end of a year in descending order as follows: (1) The outstanding value added tax amounts prior to July 1, 2007 (shall be refunded in accordance with the time sequence of the outstanding tax amounts, i.e., first occur, first refund). (2) If there is a balance after the offset, it shall be the basis for the calculation of the allowable offset of the input tax amount for fixed assets (hereinafter referred to as the refundable tax amount), the refundable tax amount may not be more than the value added tax amount newly increased during the current period. The value added tax amount newly increased = the accumulative payable value added tax amount of the current period (The input tax amount of fixed assets is not included in the input tax amounts) – (the accumulative payable value added tax amount of the same period of the previous year – the refundable input tax amount for fixed assets of the same period of the previous year) (3) The outstanding value added tax newly incurred after July 1, 2007 shall be offset against the "refundable tax amount". If there is a balance after the offset, it shall refund the taxes by the competent tax organ. The accumulative payable VAT tax amount which is mentioned in the formulas does not include the tax amounts made up in arrears upon investigations of the tax, finance, audit and other law enforcement organs. 7. If there is an existing taxpayer who is under any of the following circumstances, the taxpayer shall calculate the base of the newly increased VAT amount respectively: (1) Where the taxpayer is combined with any other enterprise, the sum of accumulative payable VAT tax amounts of the same period of the previous year before the taxpayer is combined with another enterprise shall be the base; (2) Where a taxpayer is divided into two or more new enterprises, if the new enterprises fall within the cities of the old industrial bases in the six provinces of the Central Region, the result of multiplying the ratio between the balance of the assets of the post-divided new enterprises and the balance of the assets of the taxpayer prior to the divided by the taxpayer's payable VAT amount of the same period of the previous year prior to the divided shall be the base. (3) Where the enterprise name is changed by the taxpayer, the payable VAT tax of the same period of the previous year prior to the change shall be the base. 8. For a taxpayer with headquarters and branches under the centralized accounting calculation, if the branches make their tax payments beforehand and the headquarters settles the tax payments on a consolidated basis, if it meets the following conditions, the headquarters may offset the input tax amount for fixed assets: (1) Where the headquarters is located in one of the cities of the old industrial bases in the six provinces of the Central Region; and (2) The headquarters purchases fixed assets directly, obtains the VAT special invoices and conducts accounting calculations by itself. In case the input tax amount for fixed assets incurred during the current year is quite large and the input tax amount for fixed assets to be offset by the headquarters is too much, the headquarters may adopt the advance tax payment rate, but shall ensure that the adjustment made to the advance tax payment rate can guarantee the incomes realized by the branches during the previous year as a general principle. The input tax amount for fixed assets that is allowed to be offset by the headquarters may not be more than the VAT amount settled in the current year. 9. If a taxpayer purchases a fixed asset for any of the following purposes, the input tax amount may not be offset in accordance with Article 5: (1) merely for a non-taxable item (excluding those projects under construction of fixed asset which are mentioned in the present Measures, the same hereinafter); (2) merely for a tax-free item; (3) merely for collective welfare or personal consumption; (4) for automobiles or motorcycles subject to consumption tax; and (5) for entities and individuals outside the scope of cities and industries in the old industrial cities of the six provinces in the Central Region which are prescribed in Article 2 of the present Measures. If a fixed asset, which has been offset or included in the input tax amount to be offset, is under any of the aforesaid circumstances, in accordance with the following formula, the taxpayer shall calculate the input tax amount that may not be offset: The input tax amount that may not be offset = the net value of fixed asset X the applicable tax rate The input tax amount that may not be offset may first be offset against or be deducted from the balance of the input tax amount; if there is no balance, it shall be transferred out of the input tax amount of the current period. The term "net value of fixed asset" mentioned in the present Measures refers to the net value of the fixed asset after the taxpayer makes a provision for the depreciation thereof through the depreciation method in the accounting system. 10. It shall deem the following acts of a taxpayer as a sale of goods: (1) using any fixed asset which is produced by itself or processed by others upon its entrustment merely for a non-taxable item; (2) using any fixed asset which is produced by itself or processed by others upon its entrustment merely for a tax-free item; (3) using any fixed asset which is produced by itself or processed by others upon its entrustment or purchased by itself for any other entity or individual business operator as an investment; (4) using any fixed asset which is produced by itself or processed by others upon its entrustment or purchased by itself to distribute to its shareholders or investors; (5) using any fixed asset which is produced by itself or processed by others upon its entrustment merely for collective welfare or personal consumption; and (6) using any fixed asset which is produced by itself or processed by others upon its entrustment to give gratuitously to others. If the taxpayer is deemed to have sold goods as mentioned above, the net value of the fixed asset deemed to have been sold shall be the sales amount. 11. If a taxpayer sells any fixed assets used by itself, it shall treat them subject to different circumstances as follows: (1) If the taxpayer sells a fixed asset purchased prior to July 1, 2007 and used by itself, which accords with the tax-exemption provisions, it shall still be exempted from the VAT and shall pay the VAT on the taxable fixed asset sold at the reduced half rate of 4%. (2) If the taxpayer sells a fixed asset which is purchased after July 1, 2007 and used by itself, it shall pay the sales income at the applicable tax rate and shall offset the input tax amount for the fixed asset through the methods as follows: (a) If the input tax amount for the fixed asset has been included in the input tax amount to be offset, when the taxpayer increases the output tax amount for fixed asset, the same amount shall be simultaneously deducted from the balance of the input tax amount for fixed asset to be offset and be shifted to the input tax amount for offset. If the balance of the input tax amount for fixed asset to be offset is no more than the output tax amount for fixed asset, the total balance may be shifted to the input tax amount of the current period for offset. (b) If the fixed asset is not offset or not included in the input tax amount to be offset or deducted, the input tax amount to be offset or deducted shall be calculated in accordance with the formula as follows: The to-be-offset input tax amount of the fixed asset used = the net value of fixed asset X the applicable tax rate It may incorporate the to-be-offset input tax amount of the fixed asset used into the current amount of input VAT directly. 12. A taxpayer may waive the right to offset the input tax amount for a fixed asset. The taxpayer who waives the right to offset the input tax amount for a fixed asset shall file to the competent tax organ a written declaration and shall include the input tax amount for fixed asset in the original value of the fixed asset as of the month during which the said declaration is filed, which shall be excluded from the input tax amount for offset. For a taxpayer who has waived the right to offset the input tax amount for a fixed asset but later changes its mind and requests to enjoy the offset right, it may not resume the right to offset the input tax amount for the fixed asset unless it obtains the approval of the competent tax organ after 12 full months from the month from which it begins to waive the offset right. 13. A foreign-funded enterprise which is included in the scope of implementation of the present Measures is no longer governed by the VAT refund policies on domestically produced equipment purchased within its total investment. 14. A taxpayer who enjoys the VAT preferential policy of immediate refund upon payment or refund after payment does not adopt the tax refund method to treat its input tax amount for fixed assets. It shall record it in the item "payable tax – payable VAT (input tax amount)" and shall offset it together with the input tax amount for non-fixed assets. 15. The relevant accounting treatments of taxpayers shall be implemented in accordance with the Circular of the Ministry of Finance about Printing and Distributing the Provisions on Enlarging the Scope of Offset for Value Added Tax in the Northeastern Region (Cai Kuai [2004] No. 11). 16. The Ministry of Finance and the State Administration of Taxation have the power to interpret the present Measures. 17. The present Measures shall enter into force as of July 1, 2007. The State Administration of Taxation shall formulate the specific administrative measures for the present Measures.

　

Appendix:

Industries in the Central Region under Enlarged VAT Offset Scope

　

Pilot Industry Code in “Classification of National Economic Industries” Name of Industry
equipment manufacturing industry 35 general equipment manufacturing industry
36 special equipment manufacturing industry  
39 electric machinery and equipment manufacturing industry  
41 instruments, meters and stationery and office supplies manufacturing industry  
40 communications equipment, computers and other electric equipment manufacturing industry  
376 spacecraft manufacturing  
371 railway transport equipment manufacturing  
379 transport devices and other transport equipment manufacturing  
petrochemical industry 25 petroleum processing, coking plant, and nuclear fuel processing industry
26 chemical materials, and chemical product manufacturing industry  
28 pharmaceutical manufacturing industry  
27 chemical fiber manufacturing industry  
29 rubber product industry  
30 plastic industry  
metallurgy industry 32 black metal smelting and rolling processing industry
33 non-ferrous metal smelting and rolling processing industry  
automobile manufacturing industry 372 automobile manufacturing
farm product processing industry 13 agricultural by-products food processing industry
  14 food manufacturing industry
15 beverage manufacturing  
17 textile  
18 textile, clothing, shoes and caps manufacturing  
19 leather, coat and feather or eiderdown processing  
20 timber processing and timber, bamboo, rattan, palm and grass product industry  
21 furniture manufacturing  
22 paper making and paper product industry  
42 handicrafts and other manufacturing, etc.  
Mining 06 mining and washing of coal
  08 Mining and processing of ferrous metal ores
  09 mining and washing of non-ferrous metal-ores
  10 mining and washing of non-metal ores
  11 other mining and washing industries
Electric power industry 4411 generation of firepower
4412 generation of hydropower  
4413 generation of nuclear power  
4419 generation of power by other energy resources  
4420 supply of electric power  
high tech industry The taxpayers, who fall within the scope of high and new technology as prescribed in the documents of the Condition sand Measures for Determination of High and New Technology Enterprises in the State High and New Technology Development Zones (Guo Ke Fa Huo Zi [2000] No.324 of the Ministry of Science and Technology), and the Conditions and Measures for the Determination of High and New Technology Enterprises Outside the State High and New Technology Development Zones (Guo Ke Fa Huo Zi [1996] No.018), which are printed and distributed by the Ministry of Science and Technology, and who are in conformity with other conditions, have obtained the certificates of a high and new technology enterprise issued by the provincial science and technology commission, and whose products fall within the scope of the Notice of the Ministry of Science and Technology, Ministry of Finance, and the State Administration of Taxation on Issuing the Catalogue of China High and New Technology Products (Guo Ke Fa Huo Zi [2000] No.328). The scope of specific taxpayers shall be decided by the provincial tax organs jointly with the finance organ at the same level.  

Notes:

1. Please see the National Standards of the People’s Republic of China – Classification of National Economic Industries (GB/T 4754-2002) for the specifications of the aforesaid industries.

2. The petrochemical industry does not include the coke processing industry.

3. The ferrous metal smelting and rolling processing industry, non-ferrous metal smelting and rolling processing industry, etc are included in the metallurgy industry. This industry includes the electrolytic aluminum production enterprises, and the steel production enterprises with an annual output of general steel of 2 million tons or less, or annual output of special steel of 500, 000 tons or less, or annual output of ferroalloy of 100, 000 tons or less.

4. The firepower generation taxpayers does not include the taxpayers who shall, under the Circular of the State Council on Approving and Distributing the Opinions of the National Development and Reform Commission and the Energy Office on Accelerating the Closing Down Small Firepower Generators (Guo Fa [2007] No. 2), stop its main business of using coal (oil) fuel generators to generate electricity.
  Promulgated by The Ministry of Finance, the State Administration of Taxation on 2007-05-11  
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