Consumption Tax
4 Consumption Tax
TAX REDUCTIONS, EXEMPTIONS, AND REFUNDS
LIABILITY, TIME LIMIT, AND PLACE FOR TAX PAYMENT
Consumption taxes, levied on specified consumer goods or behavior, are popular with many administrations in the world. The Provisional Regulations of the People's Republic of China on Consumption Tax currently in force was promulgated by the State Council on December 13, 1993, and came into effect on January 1, 1994.
Consumption Tax is administered by the offices of the State Administration of Taxation (SAT) (at the importation stage, it is collected and administered by Customs on behalf of the SAT).
Revenue collected from this tax goes to the Central Government. The tax represents the largest source of fiscal revenue for the Central Government. In 2003, revenue from Consumption Tax amounted to 121.08 billion yuan, accounting for about 6.0% of the country's total tax revenue.
TAXPAYERS
Entities and Activities Subject to Consumption Tax
- State-owned enterprises (SOEs), collective enterprises, private enterprises, enterprises with foreign investment, foreign enterprises, joint-equity enterprises, and other enterprises.
- Administrative units, institutions, military units, social organizations, and other units.
- Individual business operators, and other individuals engaged in the production or importation of taxable consumer goods within the territory of the People's Republic of China.
- Enterprises, units, and individuals engaged in subcontracting for the processing of taxable consumer goods, or in selling some taxable consumer goods at the retail stage.
Revenue Breakdown
At present, revenue from Consumption Tax comes mostly from the following:
- SOEs.
- Joint-equity enterprises.
- Enterprises with foreign investment that are engaged in the production of beverages (mainly alcohol), tobacco processing, the production of traffic transportation facilities (mainly the manufacturing of cars and motorcycles), and petroleum processing.
TAXABLE ITEMS AND RATES
Currently, 11 items are subject to Consumption Tax, based on either a flat rate or a fixed sum per unit. For a quick reference guide to the items that are subject to this tax and the rates applicable, please see Table 4.1.
Any adjustment to the items and rates must be sanctioned by the State Council.
If a taxpayer deals in taxable consumer goods that are subject to different rates (or tax amounts per unit), the sales values or sales volumes should be computed separately using the appropriate rates (or tax amounts per unit). Otherwise, the tax department shall apply the higher tax rate (or tax amount per unit).
TAX COMPUTATION METHODS
General Treatment
In general, computation is based on one of the following methods:
- Ad valorem/flat rate: This method is based on the sales value of the goods, on which the applicable rate is levied.
Tax payable = Sales value of taxable consumer goods × Applicable tax rate
- Quantity-based: This method is based on the sales volume of the goods, on which the applicable tax amount per unit is levied.
Tax payable = Sales volume of taxable consumer goods × Applicable tax amount per unit
Table 4.1 Taxable items and tax rates/tax amounts per unit | |||
Taxable items | Scope | Tax unit | Tax rate/amount |
I. Tobacco | |||
1. Grade-A cigarettes | Cigarettes, imported cigarettes, and other cigarettes specified by the State priced at more than 50 yuan (excluding VAT) per standard package (200 pieces) | Standard box (50,000 pieces) | 150 yuan + (Sales × 45%) |
2. Grade-B cigarettes | Cigarettes priced at not more than 50 yuan (excluding VAT) per standard package (200 pieces) | Standard box (50,000 pieces) | 150 yuan + (Sales × 30%) |
3. Cigars | 25% | ||
4. Cut tobacco | Pipe tobacco, Mohe tobacco, fine tobacco, shredded tobacco for water pipes, and yellow and red cut tobacco | 30% | |
II. Alcoholic drinks and alcohol | |||
1. White spirits made from cereal | Jin | 0.5 yuan + (Factory price × 25%) | |
2. White spirits made from potatoes | Jin | 0.5 yuan + (Factory price × 15%) | |
3. Yellow spirits | Ton | 240 yuan | |
4. Beer, Type I | Those with factory prices of more than 3,000 yuan/ton (excluding VAT), and those self-made by the entertainment and catering industry | Ton | 250 yuan |
5. Beer, Type II | Those with factory prices of not more than 3,000 yuan/ton (excluding VAT) | Ton | 220 yuan |
6. Other alcoholic drinks | Bran spirits, other white spirits, local sweet spirits, duplicate spirits, fruit wine, sparkling wine, and medicinal liquor | 10% | |
7. Alcohol | Industrial alcohol, medical alcohol, and edible alcohol | 5% | |
III. Cosmetics | Perfumes, essence of perfumes, perfume powder, lipstick, nail polish, rouge, eyebrow pencils, eye shadow, eyelashes, and complete sets of cosmetics | 30% | |
IV. Skin-care and hair-care products | Vanishing cream, face oil, toilet water, hair oil, hair paste, perming solution, hair dye alcohol, facial milk wash, frosted paste, hair nutrition paste, face film, massage cream, shampoo, hair conditioner, bath lotion, hair spray | 8% | |
V. Precious jewelry, and precious jade and stones | All kinds of gold, silver, jewelry, and precious stone ornaments | ||
1. Gold and silver jewelry, diamonds, diamond decorations | 5% | ||
2. Other precious jewelry, and jade and stones | 10% | ||
VI. Firecrackers and fireworks | 15% | ||
VII. Gasoline | Gasoline for vehicles and aviation, and starting gasoline | ||
1. Non-lead | Liter | 0.2 yuan | |
2. Lead | Liter | 0.28 yuan | |
VIII. Diesel oil | Light, heavy, farm-use, and army-use | Liter | 0.1 yuan |
IX. Motor vehicle tires | Inner tires and cover tires used on automobiles, trailers, special vehicles, and other motor vehicles | 10% | |
X. Motorcycles | 10% | ||
XI. Motor cars | |||
1. Capacity (i.e., emission capacity) of 2,200 ml or more Capacity ranging from 1,000 ml to less than 2,200 ml Capacity of less than 1,000 ml | 8% 5% 3% | ||
2. Cross-country vehicles (four-wheel drive) Capacity of 2,400 ml or more Capacity of less than 2,400 ml | 5% 3% | ||
3. Mini-buses and vans Capacity of 2,000 ml or more Capacity of less than 2,000 ml | Fewer than 22 seats | 5% 3% |
When computing a compound tax rate, taxpayers can simply combine the two methods as follows:
Tax payable = (Sale volume of taxable consumer goods × Applicable tax amount per unit) + (Sale value of taxable consumer goods × Applicable tax rate)
Determining Sales Value
The sales value of taxable consumer goods includes the total consideration and other charges (including funds, pooled funds, rebated profits, subsidies, indemnities, interest on delayed payments, commissions, packing expenses, storage charges, good-quality charges transportation and loading/unloading fees, payments received/made on behalf of others received by the taxpayers from the buyers of the goods, excluding VAT charged to the buyers.
Where the VAT is not deducted from the sales value of the goods, or where the price and the VAT are lumped together due to an inability to issue the special VAT invoices, the VAT-exclusive sales value should be worked out as follows:
VAT-exclusive sales value = Sales value inclusive of VAT ÷ (1 + VAT rate or levying rate)
Exchange Rate Conversions
The sales value shall be computed in yuan. Where the taxpayers clear the sales payments in foreign currency, the amounts should be converted into yuan at the exchange rate quoted by the People's Bank of China on the day of clearance or the first day of the month (or the rate derived in accordance with the relevant regulations). Whatever rate is used, the taxpayers should determine it in advance. Once determined, no change is allowed within one year.
Deemed Sales Value/Volume
Should the taxable price reported by the taxpayers be noticeably low without sufficient justification, the tax department shall levy the tax according to the assessable taxable price.
In general, for the purposes of levying Consumption Tax on taxable consumer goods, the sales volume refers to the quantity sold. Where the goods are sold, the volume is simply the quantity sold. Where the goods are self-produced and for self-use, it is the quantity transfered for use. Where the goods are contracted for processing, it is the quantity collected back by the taxpayers. Where the goods are imported, it is the quantity assessed by Customs.
Example A
A cigarette factory sells 100,000 standard boxes of cigarettes this month, with each box containing 250 cartons. The price of each carton is 80 yuan (no VAT) and the applicable Consumption Tax rate is 45%.
Price per box = 250 cartons × 80 yuan/carton = 20,000 yuan
Tax payable = (100,000 boxes × 150 yuan/carton) + (100,000 boxes × 20,000 yuan/carton × 45%) = 915 million yuan
Example B
A beer brewery sells 6,000 tons of beer this month at a price per ton of 2,900 yuan (excluding VAT). The applicable Consumption Tax per unit is 220 yuan per ton.
Tax payable = 6,000 tons × 220 yuan/ton = 1,320,000 yuan
Example C
A motor factory sells 5,000 cars this month. The price of each car is 80,000 yuan (excluding VAT). The applicable Consumption Tax rate is 5%.
Tax payable = 5,000 cars ç 80,000 yuan/car × 5% = 20,000,000 yuan
For goods produced from tax-paid consumer goods purchased or contract-processed by the taxpayers (e.g., cigarettes, cosmetics), the tax already paid on the purchased or contract-processed goods may be credited when computing the tax payable.
In the case of goods returned for quality reasons, the tax paid on those returns may be rebated upon approval by the relevant tax department.
Treatment of Self-Produced Taxable Consumer Goods for Self-Use
For self-produced taxable consumer goods that are for the taxpayer's own use, and that are to be input for further production of other taxable consumer goods, no tax shall be levied. Those for other use (e.g., in the production of non-taxable consumer goods, projects under construction, administrative departments, institutions of a non-production nature, the provision of labor services, gifting, financial assistance, pooling of funds, advertisements, samples, employees' welfare, and prizes) shall be taxed at the time the goods are transferred for other use.
When the tax is levied on an ad valorem basis, it shall generally be assessed according to the selling price of similar consumer goods produced by the taxpayer. If such sales data is not available, the tax shall be assessed according to the composite assessable value and the applicable tax rate.
Tax payable = Composite assessable value × Applicable tax rate
Composite assessable value = (Cost + Profit) ÷ (1 − Consumption Tax rate)
“Cost” refers to the production cost of the goods. “Profit” refers to the profit computed in accordance with the national average cost-to-profit ratio of these goods as specified by the SAT. This ratio ranges from 5% to 10% (e.g., 5% for cosmetics, 8% for small cars, 10% for white wine made from grains).
Example
A cosmetics factory distributes 1,000 bottles of hair-care lotion to employees as welfare for the month. The price per bottle is 50 yuan (no VAT) and the applicable Consumption Tax rate is 8%.
Tax payable = 1,000 bottles × 50 yuan/bottle × 8% = 4,000 yuan
In the case of compound computations, the taxpayers should also factor in the quantity of the goods transfered for use (such as cigarettes, liquor), and the statutory tax rate or tax amount per unit should be applied as well.
In the case of quantity-based computations, the taxpayers should also factor in the quantity of the goods transfered for use (e.g., gasoline, diesel), and the statutory tax amount per unit should be applied.
Treatment of Taxable Consumer Goods Subcontracted for Processing
Goods that are processed using raw materials and major materials supplied by the principals, and for which the contractors only receive processing fees and supply part of the auxiliary materials for processing, are considered goods that have been subcontracted for processing. For such goods, the tax will be withheld by the contractors upon delivery of the goods to the principals.
When the tax is levied on an ad valorem basis, it is generally assessed in accordance with the sales price of similar consumer goods handled by the contractors, and with the statutory tax rate. If such sales data is not available, the tax is assessed according to the composite assessable value and the applicable tax rate.
Tax payable = Composite assessable value × Applicable tax rate
Composite assessable value = (Cost of materials + Processing fees) ÷ (1 − Consumption Tax rate)
Example
A car manufacturing factory A subcontracts a rubber factory B to process 20,000 tires. It provides rubber to the rubber factory at a material cost of 150 yuan per tire. The processing fee is 50 yuan per tire. Supplementary materials cost 25 yuan per tire. There is no comparable sales data available. The applicable Consumption Tax rate is 10%.
The tax payable to be withheld by factory A is computed as follows:
Composite assessable price = (150 yuan + 50 yuan + 25 yuan) ÷ (1 − 10%) = 250 yuan
Tax payable = 250 yuan/tire × 20,000 tires × 10% = 500,000 yuan
In the case of compound computations, the taxpayers should also factor in the quantity of the goods recovered by the principals, and the statutory tax rate or tax amount per unit should be applied as well.
In the case of quantity-based computations, the taxpayers should also factor in the quantity of the goods recovered by the principals, and the statutory tax amount per unit should be applied.
Treatment of Imported Taxable Consumer Goods
The tax payable on imported goods that are taxed on an ad valorem basis shall be assessed according to the composite assessable value at the time of the Customs declaration.
Tax payable = Composite assessable value × Applicable tax rate
Composite assessable value = (Customs dutiable value + Customs Duty) ÷ (1 − Consumption Tax rate)
Example
A company imports 100 cars subject to a dutiable price of 100,000 yuan per car. The applicable duty rate is 30% and the Consumption Tax rate is 8%.
Composite assessable price = (100,000 yuan + {100,000 yuan × 30%}) ÷ (1 − 8%) = 141,300 yuan
Tax payable = 141,300 yuan/car × 8% × 100 cars = 1,130,400 yuan
Where the taxable prices declared by the taxpayers are obviously low without sufficient justification, the tax department shall collect the tax based on the assessable taxable price.
In the case of compound computations, the taxpayers should also factor in the quantity of the goods assessed by Customs (e.g., cigarettes, liquor), and the statutory tax rate or tax amount per unit should be applied as well.
In the case of quantity-based computations, the taxpayers should also factor in the quantity of the goods assessed by Customs (e.g., gasoline, diesel oil), and the statutory tax amount per unit should be applied.
TAX REDUCTIONS, EXEMPTIONS, AND REFUNDS
Taxable consumer goods that are exported by the taxpayers may be exempt from Consumption Tax (clearly, goods prohibited by the State from exportation falls outside this category). Some examples of goods that may be exempt are listed below:
- Goods produced and exported or delegated to foreign trade enterprises by production enterprises with import/export franchises, depending on the actual quantity and value of the goods.
- Goods re-exported after processing of the imported materials.
- Goods for everyday living imported by border residents through border trade, up to a limit of 3,000 yuan per day per person, may be exempt from Consumption Tax on their importation.
- Imported materials gifted freely by foreign governments and international organizations may be exempt from Consumption Tax on their importation.
- Meridian line tires are exempt. No Consumption Tax is levied on renovated tires.
Goods Sanctioned for Refunds or Exemptions
Some taxable consumer goods have been specified by the State as being eligible for refunds or exemptions. The main categories are listed below:
- Goods transported out of China by foreign contracting companies for use in foreign contracting projects.
- Goods purchased at home and transported out of China by enterprises for overseas investment.
- Goods sold by foreign vessel-supply companies or oceangoing transportation-supply companies to foreign vessels and ocean-going domestic vessels, charged in foreign currency.
- Goods used by enterprises engaged in foreign repair and replacement businesses for those businesses.
- Goods purchased by enterprises within the bonded zones (areas where no duty is levied when goods are imported and placed in the zones) from import/export-franchised enterprises outside the zones, for exportation or exportation after processing.
- Home-made goods purchased and exported by import/export-franchised enterprises with foreign investment that have been set up with the approval of the State Council.
Also eligible for refunds or exemptions are the following:
- Exportation by means of Chinese government foreign-aid loans, or foreign-aid joint or cooperative funds.
- Exportation by means of compensated foreign trade, barter trade, or trades with small transaction amount.
The refund rate for goods that are eligible for Consumption Tax refunds on exportation shall be determined in accordance with the previous table listing the taxable items and tax rates/tax amounts per unit.
Goods Imported by Enterprises with Foreign Investment
Taxable consumer goods imported by enterprises with foreign investment, by way of contract processing or import processing, are exempt from Consumption Tax at the stage of importation. After their importation has been processed, the goods processed or processed under contract, and the processing fees, shall be exempt from tax.
Enterprises that submit claims for refunds or exemptions should calculate and report separately the goods that are subject to different tax rates or tax amounts per unit. Otherwise, the tax department will apply the lower tax rate or tax amount per unit in computing the refunds or exemptions.
If any goods for exportation are returned after the formal tax refund or exemption process has been completed, the taxpayers should pay back the tax that has been refunded or counted as exempt if the tax was deemed exempt at importation, in accordance with the prevailing rules. Where the tax has been refunded, the tax should be paid back. Where the goods have been exempted from the tax, the sum may be paid back to the government when the goods are sold domestically.
LIABILITY, TIME LIMIT, AND PLACE FOR TAX PAYMENT
In general, the payers of Consumption Tax are the producers of the taxable consumer goods, and pay the tax at the point of sale. This holds for gold and silver jewelry, and diamond and diamond ornaments, so the tax for these items is paid at the retail stage. The exception is platinum jewelry, for which the tax is collected at the production stage.
Liability for Tax Payment
The point at which taxpayers become liable to pay Consumption Tax on their taxable consumer goods varies.
- Goods sold by taxpayers: The time at which their liability to pay the tax depends on the settlement method used.
- Credit sales and instalment payments: The day of payment is collected, as agreed in the sales contracts.
- Payments received in advance: The day the goods are delivered.
- Delegated collection of payments (including cases where collection is delegated to banks): The day that the goods have been delivered and the delegated procedures completed as well.
- Other methods: The day the payment is received, or the day the vouchers for entitlement to the sales payment are received.
- Self-produced goods for self-use: The day of transfer for use.
- Goods involved in contract processing: The day the taxpayers receive the goods.
- Goods imported by taxpayers: The day of the Customs declaration for importation.
Time Limits for Tax Payment
The assessable period may be 1 day, 3 days, 5 days, 10 days, 15 days, or 1 month. The length shall be determined by the relevant tax department according to the quantum of the tax payable by the taxpayers.
Where taxpayers are unable to assess the tax payable within the prescribed periods, the tax may be assessed on a transaction-by-transaction basis.
Taxpayers whose assessable period is 1 month shall report and pay tax within 10 days of the end of the period.
Taxpayers whose assessable period is 1 day, 3 days, 5 days, 10 days, or 15 days shall prepay the tax within 5 days of the end of the period. They shall also file the tax returns, and settle the previous month's taxes within the first 10 days of the following month.
For small enterprises with imperfect accounting systems, the tax department may assess the tax payable on a quarterly or yearly basis, depending on the production and sales of the goods. The taxes shall be paid on a monthly basis.
Taxpayers importing taxable consumer goods shall pay the tax within 7 days of the issuance of the tax payment certificates by the Customs office.
Places for Tax Payment
- Taxpayers selling taxable consumer goods and self-produced taxable consumer goods for self-use should generally report and pay tax to the relevant tax offices in the locales where the taxpayers file accounts for their businesses.
- Taxpayers that sell in another county/city or delegated sales of self-produced goods to other entities in another county/city should pay tax to the relevant tax offices in the locales where the taxpayers file their accounts or where the taxpayers are situated.
- If the head office and the branches are not located in the same county/city, the taxpayers should pay tax at the locales where the goods have been produced. If approval is obtained from the SAT and SAT offices at the provincial level, the taxes payable by the branches may be paid on a consolidated basis by the head office to the relevant tax office in the locale where the head office is situated. Taxpayers with head offices and branches in different provinces/autonomous regions/municipalities directly under the State Council must seek approval from the SAT. Taxpayers with head offices and branches in the same province/autonomous region/municipality directly under the State Council, but in different counties/cities, must seek approval from the SAT offices at the provincial level.
- For goods contracted for processing, the tax shall in general be paid by the contractors to the relevant tax offices in the locales where the contractors are situated. For goods contracted to individual business operators for processing, the tax shall be paid by the contracting taxpayers to the relevant tax offices in the locales where the contracting taxpayers are situated.
- For imported goods, the tax shall be reported and paid by the importers or their agents to the Customs offices in the locales where the imports are declared.