For 2018, one key significant change in the Tax system of China is the reduction of VAT tax rate. Please read Part II below. Another key change to come is the change in the Individual Income Tax (IIT) system effective from 1st January 2019. This change in IIT system is deemed to increase the individual’s disposable income and stimulate China’s domestic consumption; as China has been structurally dependent on export-driven GDP growth. Significant within this IIT system change are the new definitions of Tax Residency and change into a yearly-taxation system concurrent with reduction in progressive rates. Certain details are yet-to-be released by the government; possibly because the government may need to seem how the new system pans out initially.
The new Individual Income Tax Law will be effective from 1ST January 2019
The key changes:
1 Criteria for tax residency status
Individuals with domicile in China, or without domicile in China with physical presence of no less than 183 days in China within one tax year.
Individuals without domicile in China and do not reside in China, or without domicile with physical presence in China of less than 183 days within one tax year.
2 Categories of Individual Income and Tax Rates
|A||Comprehensive Income: Income from wages and salaries, remuneration for personal services, manuscripts, royalties||3%-45%, 7 brackets of progressive tax rates|
|B||Business Income||3%-35%, 5 brackets of progressive tax rates|
|C||Income derived from interest dividends and bonuses, lease of property, transfer of property, Contingent Income||20%.|
See appendix for Individual Income Tax Rate of Item A
For Item A, the Comprehensive Income, the individual income tax (IIT) shall be calculated on a consolidated basis for the tax year for resident taxpayer. But for non-resident taxpayer, it shall be calculated on a monthly basis or timely basis.
For Item B and Item C, the income received by tax payer, the IIT shall be calculated respectively in accordance with the provisions of the law.
3 New Changes for Deductible Items
Individual Income Tax Rate
|S/N||Annual (monthly) taxable income (RMB)||Tax Rate（％）|
|1||Not over 36,000 (Not over 3,000)||3|
|2||Over 36,000 to 144,000 (Over 3,000 to 12,000)||10|
|3||Over 144,000 to 300,000 (Over 12,000 to 25,000)||20|
|4||Over 300,000 to 420,000 (Over 25,000 to 35,000)||25|
|5||Over 420,000 to 660000 (Over 35,000 to 55,000)||30|
|6||Over 660,000 to 960,000 (Over 55,000 to 80,000)||35|
|7||Over 960,000 (Over 80,000)||45|
From 1st May 2018, the new VAT tax rates were applied.
VAT tax rates are different according to different industrial sectors. Generally, the VAT rates are 16%, 10%, 6%, 5%, 3%, 0%. If the entity is a General VAT Tax Payer, the VAT output (VAT on Sales) can be offset with VAT input (VAT on Expenditure). (Prior to 1st May 2018, the most commonly applied VAT rate was 17%, which had since been reduced to 16%).
Surtaxes rates is different in different districts of a city and in different cities. Generally it is 7%, 5%, 1%, 3%, 2% of the VAT paid.