Value-Added Tax System in China for Agricultural Products

DTB worked with several other firms to develop this study on the structure and impacts of China’s VAT for agricultural products, finding that it discriminated against agricultural imports and likely violated China’s WTO commitments.

Executive Summary
China maintains a value added tax (VAT) system for most commercial transactions, including those for agricultural products. The nominal VAT on domestically produced agricultural products is zero for farm level production, 13 percent for first stage processed products, and 17 percent for value added products.

The basic structure for the payment of the VAT at various stages of the marketing chain is:

Tax Paid = Output Tax – Input Tax

where output tax is the seller’s price (or “amount”) multiplied by the applicable VAT rate (e.g.13 percent or 17 percent), and where the input tax is the VAT tax from the special VAT invoices or import invoices obtained during production by the seller, plus any deemed deductions allowed if the purchase is from an agricultural producer. (“Deemed deductions” are deductions calculated on the basis of the imputed VAT payment in cases where no payment was required.)

These input tax deductions, especially the deemed deduction allowance, result in effective VAT rates on domestically produced products far below the rates paid by equivalent imports. For the sale of products by agricultural producers, the effective VAT rate would be zero based on China’s VAT regulations. The effective VAT on the sale of first stage processed products, referred to as primary processors in this report, is significantly reduced from the nominal rate of 13 percent through a series of deductions.

The most important of these deductions is a deemed deduction of 13 percent on the sale of products by primary processors. This deduction is provided under the rationale that the producer has paid a full 13 percent VAT on the sale of his products, when in fact, he is provided a complete VAT exemption. Similarly, value added agricultural products in China are provided a series of deductions, explained in the report, that result in an effective VAT significantly below the nominal VAT rate of 17 percent.

While domestically produced agricultural products receive significant deductions from nominal VAT charges, agricultural imports must pay the full VAT rates of either 13 or 17 percent. This places imported products at a significant price disadvantage relative to domestically produced product.