China Announces VAT Pilot Project for Agricultural Products

The Ministry of Finance and the State Administration of Taxation issued on April 6, 2012 the “Circular on Measures for the Pilot Project of Assessment and Deduction of Input Value-added Tax (VAT) on Agricultural Products in Certain Industries (caishui[2012] No.38, hereafter referred to as ‘Pilot Project Circular’).

The Pilot Project Circular announces that, starting from July 1, 2012, VAT general taxpayers who purchase agricultural products as raw materials for the production and sale of liquid milk and dairy products, liquor and ethyl alcohol, or vegetable oil, will be able to deduct input VAT in accordance with methods provided in the Circular. Agricultural products refer to those primary products listed in the “Explanation of Taxable Scope of Agricultural Products (caishuizi [1995] No. 52).”

Regardless of whether the purchased agricultural products are used for the production of the aforementioned products, the input VAT is deductible in accordance with the methods provided in the Circular. There are three categories of calculation methods, depending on whether the agricultural products are purchased for producing goods, for sales directly, or for manufacturing and operation without constituting the actual goods.

Where the agricultural products are purchased for producing goods, the input VAT amount can be calculated using three different methods. One method is the input-output method. This method uses national and industry standards to determine the amount of agricultural products used in unit sales, which in turn forms the basis of determining the deductible input VAT amount.

Taxpayers who fall under the Pilot Project and purchase agricultural products for producing goods should submit documents for applying for the determination of the deduction rate of input VAT to related tax authorities before January 15 every year (July 15 for the year 2012), or within 30 days after the commencement of production. Other taxpayers who fall under the Pilot Project should file for record with the in-charge tax authority when declaring and paying the relevant tax. The documents and the requirements will be decided by provincial tax authorities.

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