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Use K/3 system to address Chinese VAT issues

1. Background

  • What is VAT?
    VAT is the abbreviation of Value Added Tax. It is required by the Chinese government that any company or individual who sells product, provides service or imports goods in China should pay VAT.
  •  How VAT is calculated and collected?
    Theoretically VAT is the tax collected against the value added during the business process, i.e. (sales amount-purchase amount)*VAT rate. But in reality the VAT payable is calculated as Output VAT-Input VAT. A company should pay Input VAT (goods amount*VAT rate) to its suppliers. And when it sells its own product or service to its customers, its customers should pay their Input VAT (goods amount*VAT rate) to the company and this is this company’s Output VAT. Then the Input VAT can be deducted from the Output VAT and here comes the actual VAT payable.
  • Who should pay VAT?
    There are 2 types of taxpayers: industry common taxpayer and small-scale taxpayer. For the former, VAT rate is 17% and the Input VAT is deductable from the Output VAT. While the latter (, VAT rate is 3% and the Input VAT is not deductable from the Output VAT.) are taxed on the basis of the revenue derived from sales of goods or provision of taxable services by applying proper rates (4% for commercial sector, and 6% for other sectors). The computing formula of tax payable for small-scale taxpayer is:  Tax payable=Sales amount × Applicable rate.

2. How to use K/3 system to handle VAT processing

The K/3 system comes with the following features to facilitate the processing of VAT

1. Automatic calculation of input VAT and output VAT on the basis of transaction amount in relevant business transaction forms. This includes input VAT in purchase order (Pic. 1), purchase invoices (Pic. 2) and output VAT in sales order (Pic. 3), sales invoice etc (Pic. 4). A summary report for all input VAT (Pic. 5) and all output VAT (Pic. 6) will be provided.


(Pic 1 Purchase Order)
 


(Pic 2 AP Invoice)
 

 
(Pic 3 Sales Order)

 

(Pic 4 AR invoice)
 

 
(Pic. 5 Input TAX summary)
 


(Pic. 6 Output TAX summary)
 


2. Different types of invoices will be provided to accommodate different tax rates and follow different calculation of VAT or non-VAT tax, such as service tax, flat tax, etc. Besides, in both the master file and each individual invoice, the applicable tax rate is user-definable. Please see Pic. 7 for a not-VAT tax sale invoice.


(Pic. 7 common invoice for sales)
 

3. When a transaction document is booked into GL, the tax amount will also go to a specific tax account code. All the tax-related account codes are structured as the sub-account codes to
4. Tax/VAT Payable so that the actual tax payable will be automatically available from GL by rolling up all the sub-accounts’ balance when all the transactions have been booked financially (Pic. 8).


(Pic. 8 G/L account summary of actual tax payable)