Value-Added Tax (VAT) and Corporate Income Tax(CIT)

In corporate financial activities, taxes play a crucial role, especially Value-Added Tax (VAT) and Corporate Income Tax(CIT), which are the two major types of taxes that enterprises must face. However, do you understand the differences between the two?

Value-Added Tax is levied based on the value added to goods or services during the production and distribution process. According to annual sales and accounting standards, VAT taxpayers are classified into small-scale taxpayers and general taxpayers. The criteria for distinguishing between small-scale and general taxpayers are as follows:

Type of VAT Taxpayers	Small-scale Taxpayers	General Taxpayers
Basis of division	Newly established companies or companies with an annual income of less than 5 million yuan	Companies with an annual income of more than 5 million yuan or those with operational needs
VAT Rate	Generally apply a 3% collection rate	General production or sale of goods is 13%, and the service industry tax rate is 6%.
Exports are tax-exempt without tax rebates	Purchasing goods with  regular invoices	Purchasing goods with regular invoices
exports are tax-exempt and eligible for tax rebates	/	Purchasing goods with special invoices
Preferential policies	Monthly income below 100,000 yuan before December 31, 2027, and a 1% tax rate for income above 100,000 yuan.	/

Corporate Income Tax is levied on the net income of a company over a certain period, calculated based on the net profit of the enterprise. CIT taxpayers are classified into small and micro enterprises and general enterprises.

- Small and micro enterprises that meet the "335" criteria are considered as such: fewer than 300 employees, net profit of less than 3 million yuan, and total assets not exceeding 50 million yuan. The usual tax rate is 20%, but before December 31, 2027, they can enjoy a preferential tax policy with an actual tax burden of 5%.

Note: The classification of CIT taxpayers does not consider the status of VAT taxpayers; general taxpayers can also be small and micro enterprises.

- General enterprises are those that do not meet the "335" criteria. The tax rate is 25%.

The differences between VAT and CIT are as follows:

·         Tax base: The tax base for VAT is the value added to goods or services, while for CIT, it is the net profit of the enterprise.

·         Taxation stage: VAT is collected at every value-added stage of goods or services, while CIT is only collected after the formation of corporate profits.

·         Tax burden bearer: The tax burden of VAT is ultimately borne by consumers, while the tax burden of CIT is borne by the enterprise itself.

·         Impact of tax policies: Adjustments in VAT policies directly affect the prices of goods and services, while adjustments in CIT policies affect the after-tax profits of enterprises.

Understanding these differences helps enterprises to plan their taxes rationally, reduce tax burdens, and enhance competitiveness. David Consultant specializes in providing suitable tax planning solutions for clients, saving on business operating costs, and welcomes inquiries.