General Taxpayer vs Small Scale Taxpayer Which Option is Best for Your Company in China

Julie Yu
Sep 20
5 min read

Starting a business in China is an exciting venture, but it comes with crucial decisions that can greatly impact your company’s future. One of the most vital choices you will make is determining whether to register as a General Taxpayer or a Small Scale Taxpayer. This decision can affect your finances, compliance obligations, and the efficiency of your operations. In this post, we’ll delve into the differences between these taxpayer categories, their pros and cons, and help you figure out which option fits your business best.

Understanding the Taxpayer Categories

China's tax system sorts businesses based on revenue and size. The two main categories are Small Scale Taxpayer and General Taxpayer.

Small Scale Taxpayers tend to be smaller businesses with lower annual sales, benefiting from a simplified tax structure that includes a VAT rate of 3% and more relaxed compliance requirements.
General Taxpayers are usually larger businesses with higher sales, facing a standard Value Added Tax (VAT) rate of 6% to 13% based on the products or services they provide. They can also issue special VAT invoices, which are essential for clients who wish to claim VAT credits. See the different VAT rates for different industries as below:
1) 13%
for companies selling or importing goods (except for some special listed goods) or providing processing or repair services;
2) 9%
for company selling special products or real estate or providing construction, transport, postal or basic telecommunications services;
3) 6%
for companies providing modern services such as financial or value-added telecommunications services, IT and Cultural Creative Services and other life services.

Additionally, general taxpayers can credit input VAT from output VAT, and they are entitled to VAT export exemptions and refunds. Thus, the tax rate sometimes is 0%

Check the following charter for a better understanding:

China taxpayer comparison

Understanding these categories is essential for making a sound choice about your business structure in China.

Key Differences Between General and Small Scale Taxpayers

Tax Rates

Tax rates are one of the most vital differences between General and Small Scale Taxpayers.

General Taxpayer: The standard VAT rate ranges from 9% to 13%. For example, if your company sells equipment worth 100,000 CNY, and you are a General Taxpayer at the 13% rate, you will owe 13,000 CNY in VAT. However, you can also claim back the VAT you've paid on your business purchases, which can significantly reduce your overall tax payment.
Small Scale Taxpayer: Carry a VAT rate of 3%. Using the same equipment example, if you are a Small Scale Taxpayer, you would only owe 3,000 CNY in VAT. This lower rate simplifies tax calculations and can be favorable for businesses with limited revenue.

Invoicing Capabilities

Invoicing practices also highlight important distinctions:

General Taxpayer: They can issue special VAT invoices (fapiao), which clients need for VAT deductions. This capability can strengthen relationships with larger clients who require VAT invoices, helping you grow your sales.
Small Scale Taxpayer: They can only issue ordinary invoices, missing out on the potential to accommodate clients needing VAT credits. This limitation can make it more challenging to attract larger companies that prefer working with General Taxpayers.

Compliance Requirements

The compliance landscape diverges sharply between the two classifications:

General Taxpayer: They must follow strict compliance protocols like detailed bookkeeping and frequent tax filings. According to a report by the China Association of Taxation Professionals, 65% of General Taxpayers reported higher administrative costs due to these requirements.
Small Scale Taxpayer: They enjoy easier compliance, reducing the need for complex accounting systems. This is particularly beneficial for small business owners who may lack extensive tax knowledge.

Advantages of Being a General Taxpayer

Registering as a General Taxpayer presents several benefits that can pay off for your business in the long term.

Input VAT Credits

The ability to claim input VAT credits is one of the most significant advantages. This means you can subtract the VAT on your purchase costs from the VAT you owe on your sales. If you regularly buy supplies or services, these credits can lead to considerable savings.

Enhanced Credibility

Being a General Taxpayer can improve your company’s credibility. Many larger clients prefer partnerships with General Taxpayers because they can provide special VAT invoices. A survey by the China Enterprise Association found that 70% of large companies prioritize suppliers who can issue VAT invoices.

Access to Larger Markets

With the ability to provide VAT invoices, General Taxpayers can tap into larger markets. This opens the door to significant sales opportunities, particularly with clients who prefer or require the ability to deduct VAT.

Disadvantages of Being a General Taxpayer

Despite its advantages, being a General Taxpayer has drawbacks.

Higher Compliance Costs

General Taxpayers face more intense compliance needs, which often result in elevated administrative costs. According to a recent study, these businesses can pay up to 30% more in accounting fees compared to Small Scale Taxpayers.

Increased Tax Burden

Although you can claim VAT credits, the standard rates are higher. This can translate to a bigger overall tax obligation, especially if your input costs are not high.

Advantages of Being a Small Scale Taxpayer

Choosing Small Scale Taxpayer status has distinct benefits, especially for entrepreneurs and small businesses.

Simplified Tax Regime

Small Scale Taxpayers are part of a simplified tax framework, featuring easier compliance and reporting. This can save you valuable time that is better spent on growing your business.

Lower Tax Rates

The 3% VAT rate for Small Scale Taxpayers can help maintain a healthier cash flow, allowing businesses with lower revenue to thrive.

Less Administrative Overhead

With fewer compliance responsibilities, Small Scale Taxpayers experience lower administrative costs. This is particularly crucial for small businesses lacking extensive resources to handle tax complexity.

Disadvantages of Being a Small Scale Taxpayer

While beneficial, there are limitations as well.

Limited Invoicing Capabilities

A significant drawback is the inability to issue special VAT invoices. This can deter larger clients who require these for their own accounting processes.

Reduced Credibility

Some companies may view Small Scale Taxpayers as less credible, which can hinder networking opportunities and contract awards, particularly with larger enterprises.

Growth Limitations

If your business grows and surpasses the revenue limit set for Small Scale Taxpayers, you will need to transition to General Taxpayer status. This shift may involve additional costs and compliance complexities.

Factors to Consider When Choosing Your Taxpayer Status

Choosing between General and Small Scale Taxpayer status involves several considerations.

Business Size and Revenue

The size and anticipated growth of your business are crucial. If you expect to scale up and achieve higher sales, registering as a General Taxpayer may be beneficial to accommodate that growth.

Client Base

Take your target audience into account. If your strategy involves working with larger clients who need VAT invoices, being a General Taxpayer would be essential to capture that market segment.

Administrative Capacity

Assess your business’s administrative capabilities. If you have the means to handle the requirements of being a General Taxpayer, the advantages might outweigh the challenges. Conversely, if you seek ease with tax matters, Small Scale Taxpayer status might be better.

Making an Informed Choice

Selecting the right taxpayer status is one of the most impactful decisions for your company in China. Each option presents unique benefits and challenges, and the ideal choice will depend on your specific situation, business goals, and clientele.

By considering the factors discussed in this post, you can make a well-informed decision that aligns with your business strategy and helps you navigate the complexities of China’s tax landscape effectively. Understanding your rights and obligations, whether as a General or Small Scale Taxpayer, will empower you to manage your business more effectively and pursue your entrepreneurial ambitions.

If you need more information, please feel free to contact our expert: expertinchina@gomaxgroup.com