Every VAT system divides taxpayers into two groups, and in China the split is not about how much tax you pay. It is about how you compute it — whether you subtract what you paid on inputs, or simply multiply turnover by a fixed rate.
That difference drives everything else: the invoices you can issue, the customers who will buy from you, and whether a 5 million yuan turnover line is a wall or a door.
The line at five million
Article 9 of the VAT Law defines a small-scale taxpayer as one whose annual VATable sales do not exceed 5 million yuan. Above that, registration as a general taxpayer is compulsory, not optional.
Below it, there is a choice. Article 9(2) allows a small-scale taxpayer with sound accounting and the ability to provide accurate tax information to register voluntarily and use the general method. Many small companies do this anyway, for reasons that have nothing to do with their own tax bill.
What counts toward the threshold
The measurement is not the last twelve calendar months. STA Announcement No. 2 of 2026, Article 3 defines it as cumulative VATable sales over any consecutive period of no more than 12 months or four quarters, including months in which no sales were made.
Two refinements matter in practice:
- Incidental disposals are excluded. A one-off sale of an intangible or a transfer of real property is not counted toward the threshold. A company that sells a building does not thereby become a general taxpayer.
- Adjustments are counted back. Where sales are revised upward through voluntary correction, risk screening or an audit, the adjusted amount is attributed to the period in which the tax obligation arose — not to the period in which the adjustment was made.
Two ways to compute the tax
The general method nets input against output. The simplified method ignores inputs entirely.
| General taxpayer | Small-scale taxpayer | |
|---|---|---|
| Method | Output VAT minus input VAT | Sales × levy rate |
| Rate | 13%, 9% or 6% by category | 3% (reduced to 1% through 2027) |
| Input credit | Available on qualifying invoices | Not available |
| Invoices issued | Special VAT invoices at the full rate | General invoices; special invoices at 1% or 3% |
| Accounting burden | Full input tracking, monthly filing | Substantially lighter |
The last two rows are where the real decision lives, and they are commercial rather than arithmetic. A small-scale supplier can only issue a special invoice at 1% or 3%, so a customer who is itself a general taxpayer can credit far less. For a business selling to other VAT-registered companies, being small can mean losing the order — not losing a tax argument.
The rate changed in 2026
Article 11 of the VAT Law sets a single levy rate of 3% for the simplified method. The standard rates that apply under the general method — 13%, 9% and 6%, by category — are set out in China VAT rates. Before 2026 there were two levy rates, 3% and 5%, and the 5% band applied to things like real property leasing and certain labour dispatch arrangements. It is gone. Existing contracts priced on the assumption of a 5% levy rate should be rechecked.
Small-scale relief
Two measures sit on top of the 3% rate, both running to 31 December 2027 under MOF and STA Announcement No. 10 of 2026:
- A threshold below which no VAT is due. 100,000 yuan per month, or 300,000 per quarter, or 1,000 per transaction where tax is assessed per transaction. Article 23 of the VAT Law makes this a statutory exemption rather than a discretionary relief.
- A reduced rate of 1%. Small-scale taxpayers pay 1% instead of 3% on all taxable transactions except the sale or leasing of real property and the transfer of land use rights — those stay at 3%.
Together they mean a small service business turning over 80,000 yuan a month pays nothing at all, and one turning over 200,000 a month pays 1% rather than 3%. That is the practical weight of the status, and it is why the 5 million line matters so much to a growing company.
Crossing the line
This is where the 2026 rules became materially stricter, and where most of the planning risk now sits.
Article 36 of State Council Order No. 826 provides that a taxpayer whose sales exceed the threshold must register, and is subject to the general method from the first day of the period in which the threshold was crossed. Article 6 of STA Announcement No. 2 of 2026 confirms the effective date, and Article 8 adds that failing to register on time does not postpone it: five working days after the deadline, the taxpayer is administered as a general taxpayer with the original effective date.
The door only opens one way. The same Article 36 states plainly that a taxpayer registered as a general taxpayer may not convert back to small-scale. There is no annual re-test, no falling back if turnover drops, no reversal if the registration was voluntary. A company that registers early to win a contract, then loses the contract, stays a general taxpayer — with the accounting obligations that implies.
The practical consequence: a company close to the line should model the crossing before it happens, because the decision is irreversible and takes effect retroactively to the start of the period, not from the date the paperwork is filed.
Worked example
A services company with 4,800,000 yuan of VAT-exclusive sales and 2,000,000 of VAT-exclusive purchased services, comparing the two positions:
| Small-scale (1%) | General (6%) | |
|---|---|---|
| Output VAT | — | 288,000 |
| Input VAT creditable | — | 120,000 |
| VAT payable | 48,000 | 168,000 |
The small-scale position pays 120,000 less. Purely on tax, staying small wins by a wide margin.
But now price the same company's output for a corporate customer that is a general taxpayer. At 1%, that customer can credit 48,000 of input VAT on a 4.8 million purchase. At 6%, it can credit 288,000. The customer is 240,000 better off buying from the general taxpayer — which means the small-scale supplier either absorbs that in its price or loses the deal. That is the trade the arithmetic above does not show, and it is usually the one that decides the question.
The special invoice problem
A small-scale taxpayer is not barred from issuing special VAT invoices — but the rate on them is 1% or 3%, and that is the whole difficulty.
Put a 1,060,000 yuan purchase in front of a general-taxpayer buyer and compare two suppliers at the same headline price:
| Supplier | Net price | VAT on the invoice | Credit to the buyer |
|---|---|---|---|
| General taxpayer at 6% | 1,000,000 | 60,000 | 60,000 |
| Small-scale at 1% | 1,049,505 | 10,495 | 10,495 |
The buyer is 49,505 worse off buying from the small supplier at the same price. It is not a pricing opinion — it is the arithmetic on the invoice. A procurement department that runs this comparison will either demand a discount of roughly that amount, or take the business elsewhere.
So the small-scale status is genuinely cheaper on the tax line and genuinely more expensive in the market, and which one dominates depends entirely on who the customers are. A retailer selling to consumers keeps the benefit. A subcontractor selling to manufacturers usually cannot.
Where companies get it wrong
- Treating 5 million as a calendar-year test. It is a rolling 12-month or four-quarter measure.
- Assuming the crossing takes effect next month. It takes effect from the first day of the period in which the threshold was crossed, and late filing does not move it.
- Registering early to win one contract. The registration cannot be undone, even if the contract falls through.
- Applying 5% to property leasing. The 5% levy rate no longer exists under the VAT Law; only 3% remains, with the 1% reduction running to end-2027.
- Counting an incidental property sale toward the threshold. It is expressly excluded.
- Ignoring the customer side. The tax comparison favours staying small almost always; the commercial comparison often does not.
Sources and current status
- VAT Law of the PRC (Presidential Order No. 41), Articles 8, 9, 11 and 23 — effective 1 January 2026.
- State Council Order No. 826, Article 36 — registration obligation, effective date, and the prohibition on converting back.
- MOF and STA Announcement No. 10 of 2026, Articles 1 and 3(3)(6) — the 100,000/300,000 threshold and the 1% reduction, both through 31 December 2027.
- STA Announcement No. 2 of 2026, Articles 3, 5, 6 and 8 — measurement period, filing deadlines, effective date and late-filing consequences.
Status note. The 1% reduction and the 100,000 monthly threshold are time-limited to 31 December 2027. The 3% levy rate and the 5 million threshold are in the statute itself and are not time-limited, but Article 9(3) allows the State Council to adjust the threshold with NPC Standing Committee filing.
This is a plain-English reference, not tax advice. The right status depends on customer mix, input profile and growth plans that cannot be assessed from a summary. Confirm with a licensed practitioner before registering or restructuring.