Did you know you can save up to 16% on imports from China through its VAT refund policy?

Updated: Jul 9, 2018

China is popularly known as the world’s factory. One of the prime reasons of how China is able to offer such competitive pricing on its produce is the tax support from its government. Apart from the economies of scale that the factories utilize as one of the factors for lower costs, Chinese export policy also entitles export entities to a refund on the VAT paid.

When an exporter buys or makes products in China, the whole supply chain downstream had already paid tax on the components. Now to make its products competitive in the world market, Chinese government came up with the policy of refunding cer tain amount of VAT on the items being exported. All the items are entitled to VAT refunds as per th e HS code categories and the business classification. From May 1, 2018 the maximum VAT refund has been changed from 17% to 16%. Other categories are 10%, 6% and 0%, depending on the type of goods exported and their HS codes.

How to benefit from this policy as a buyer?

First and foremost your supplier should be paying its due taxes on your invoices.

Many companies in China don’t pay taxes on a large amount of their production to keep their annual income low. However, to be able to claim these benefits all your suppliers should provide you VAT paid invoices. Once that is available, you have two choices:

1- Setup a small subsidiary trade company in China. This company can collect invoices from your vendors, process VAT refund claims and also sell th e goods to the parent company. In short your own Chinese trade company. This is easy to set up through agents but the costs of maintaining the company, hiring the right people etc. can offset the benefits for you.

2- Hire a consulting/trade company in China to do this for you. These companies can act as your representative office at a small fees. The fees usually range from 1.5% to 2% of your shipment value for these kind of services. Some of these companies can even provide you with advance refunds.

An example:

Company A buys automobile components from multiple vendors and total Invoice value for the shipment is USD 100,000 (including 16% VAT paid by the vendors). For clarity, let’s say all the products are eligible for 16% VAT refund. The refund would be calculated as

(100,000/1.16) * 16% which is roughly 13,800 USD.

Generally, the government takes 2-3 months for processing the refund claims. But in case a VAT agent is offering your advance refund, you would only need to pay

USD 88,200 {100,000- 13,800 + 2000 (assuming service fees of 2%)}.

Effective savings of USD 11,800. This also saves your cost of working capital on that amount.

Aurora Ventures can help you save VAT cost on your imports. We offer advance VAT refunds in most of the cases. Get in touch at connect@auroraventures.in to know more.

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