All companies incorporated in China need to register for the payment of VAT once their sales exceed a certain level (varying between regions, but generally very low e.g. starting at 10,000 – 20,000 RMB per month). When the registration is made, companies need to choose whether they are ‘General VAT payers’ or ‘Small-scale VAT payers’, based on their annual turnover. The distinction is very important:

• ‘Small-scale VAT payer’ applies to companies with annual turnover below 800,000 CNY for commercial companies, or 500,000 CNY for manufacturing companies. In this case, the VAT is calculated at a flat rate of 3%, rather at the statutory rate (13%, 9% or 6%). However, small scale VAT payers will not be able to deduct input VAT, nor to issue Special VAT invoices (‘fapiao’) to Chinese clients.
• ‘General VAT payer’ for all other entities, for which VAT is calculated at the statutory 13%, 9% or 6% rate. A general VAT payer enjoys input VAT credit for the purchase of goods or services.

In limited cases for certain businesses, SMEs may find it more convenient to register as ‘General VAT payer’ rather than ‘Small-scale VAT payer’, because for some businesses the benefits from deducting input VAT may be higher than those obtained from lower VAT rates; at the same time, the majority of Chinese suppliers will require Special VAT invoices when doing businesses, which ‘small-scale VAT payers’ will be able to provide only through intermediaries (after the payment of a fee).