Importance of indirect taxes
China’s indirect taxes comprise the bulk of the government’s total tax revenue. Thus, the management of indirect taxes such as VAT and consumption tax is central to doing business in China. Over the years, China has expanded its VAT reforms for the trade of goods and services including tax exemptions.
Also, read more about VAT Exemption on Sales of Services to Foreign Countries
Nevertheless, it remains a challenge for overseas companies such as those providers of services to China to register or account for VAT. Without a permanent establishment, non-resident enterprises are not entitled to issue VAT invoices nor claim input VAT credits. However, they are subject to VAT through the local withholding agent being the recipient of the service.
The government’s ability to improve its collection of indirect taxes will secure a consistent revenue source to aid the economy. However, the nature of indirect taxes as based on consumption poses challenges in monitoring business activities and thus, preventing fraud. China, as one that has a complex tax system, developed the golden tax system to ensure that tax authorities can thoroughly inspect all VAT invoices.
On the other hand, China has already made huge efforts in building a paperless tax services environment. For one, the development of the e-tax system proves to be promising in terms of streamlining the administration of taxes.
Education surcharges levied at three percent of the amount of VAT and consumption tax also fall under the unified tax for foreign-invested enterprises. Hence, it is likely that it will also take the form of the new urban construction and maintenance law.
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