Shanghai announces enhanced refunds of unutilized input VAT

With a two-month COVID-19 lockdown coming to an end, the government of Shanghai announced on 29 May 2022 action plans to stimulate post-lockdown economic recovery. As part of the action plans, the Shanghai government has implemented enhanced refunds of unutilized input VAT (i.e., creditable input VAT in excess of output VAT) for Shanghai businesses.

Shanghai's local refund regime generally is consistent with Bulletin [2022] No. 14 (Bulletin 14), which was released in March 2022 by the Ministry of Finance (MOF) and the State Taxation Administration (STA) (please click here to view our tax newsflash on Bulletin 14). Bulletin 14 allows qualifying businesses in six sectors (manufacturing, science research and technology services, electricity/heat/gas/water generation and supply, software and information technology services, ecology and environment protection, and transportation, warehousing, and postal services) to claim refunds of:

• Newly increased unutilized input VAT (which is determined by comparing the unutilized input VAT at the end of an assessment period against the unutilized input VAT on 31 March 2019); and
• Unutilized input VAT incurred prior to 1 April 2019.

The MOF and STA also published two bulletins in April and May 2022 requesting local tax authorities to accelerate the refunds of unutilized input VAT incurred prior to 1 April 2019. The Shanghai government's action plans confirm accordingly that all qualifying Shanghai businesses may submit refund applications (for unutilized input VAT incurred prior to 1 April 2019) in the June 2022 VAT filing period, and the tax authorities will use their best efforts to complete the refund process by 30 June 2022. This is far ahead of the original schedule in Bulletin 14, which stated that medium and large-sized businesses could start applying for such refunds in the VAT filing periods of July and October 2022, respectively.

The Shanghai government's action plans also disclose that the refund regime may be expanded to cover more sectors, subject to approval by China’s central government. According to a notice published by the State Council on its website on 31 May 2022, the following seven sectors may join the refund regime, although more details (e.g., effective date, scope) still must be confirmed:

• Wholesale and retail;
• Agriculture, forestry, husbandry, and fishery;
• Hospitality and catering;
• Personal services (e.g., housekeeping, laundry, dependent care, etc.) and repair services for automobiles, computers, and home appliances;
• Education, health, and social work-related services;
• Culture and sports; and
• Entertainment.

The STA, along with five other government agencies, jointly released a notice in May 2022 announcing their intention to strengthen audits and investigations of fraudulent unutilized input VAT refund claims, and the STA has disclosed a number of noncompliant cases in multiple provinces where penalties were imposed. Certain taxpayers may be subject to scrutiny by the tax authorities after submitting refund applications and thus should begin preparations as early as possible in order to be fully prepared before applying for refunds. Taxpayers should review their internal documents and consider the following issues to ensure the correct computation of unutilized input VAT:

• Whether the output VAT is computed based on the correct sales amount and tax rate;
• Whether the taxpayer has valid documents to support the credit of input VAT; and
• Whether any non-creditable input VAT (e.g., the input VAT on certain materials purchased and consumed for VAT-exempt sales) has been taken into account in computing the unutilized input VAT.

If you have any questions, please contact:
 

Maria Liang
Managing Partner for Tax & Business Advisory - Eastern Region 
+86 21 6141 1059
mliang@deloitte.com.cn

Li Qun Gao
Indirect Tax and Customs & Global Trade Services Regional Leader - Eastern Region
+86 21 6141 1053
ligao@deloitte.com.cn