VAT rebate in China

I have seen a lot of articles online that are talking about Chinese VAT rebate thing. VAT is the short form of Value Added Tax and VAT Rebate means Chinese government gives a certain amount of tax exporters paid back to Chinese exporters as an incentive to export more products. How much exporters can be refunded depends on which classification your product belongs to. The VAT rebate rate varies by different product classification. The current Chinese VAT is 16%, so the VAT rebate of all products are no more than 16%.

For work gloves, the VAT rebate rate for coated gloves, string knit gloves, and canvas gloves is 16%. For leather gloves and mechanical gloves, it is 13%.

These articles are usually written by some foreign guys who have some direct or indirect interaction with Chinese side. They said the VAT rebate is an extra profit Chinese exporters get besides their regular profit and this extra profit is very high. So when importers discuss business with exporters, VAT rebate should be considered as an extra part and importers should discuss with exporters to organize this part by themselves to get a rock-bottom factory price. This is one of the articles I have read about this topic: https://www.smartchinasourcing.com/vat-and-vat-rebate-why-worry/

In this article, the author first gives a little bit of color about what VAT rebate is in China, and then states why as a importer, you should get to know it and how importers can pocket this rebate. I was stunned after seeing it. What a misleading article!

Just imagine that you can get 16% off out of your buying price, how good it is! But actually this is just too good to be true. Having said that, I will say these foreign guys are totally wrong. They do not really know how it looks like in China. In this article, the author suggests importers to try to get a price from factory that is no VAT included and pocket the benefit of VAT rebate. Well, if you had done that, I would say that you would get in trouble. Why? That is because you have to get VAT invoice from supplier in order to get VAT rebate. Without VAT invoice, you get nothing back. A Chinese VAT invoice looks like this:

Issuing this kind of VAT invoice is a cost for factories which takes a cost of around 9% of total glove cost. If the price factories offer does not involve VAT, then 9% is off. That factories offer without VAT involved is only for Chinese domestic market. But if you do exportation, VAT invoice is a must. Otherwise, you lose VAT rebate.

Let’s see how much VAT rebate you can actually get from 16% VAT rebate as a glove trader in China. 13.8% is the actual VAT rebate (16% ÷1.16). Lets say the VAT invoice cost is 9%. After 9% is deducted from 13.8%, you can see how much is left? 4.8%. That is to say your VAT rebate is actually only 4.8%. Another thing is that factories can get this 4.8% back in the next month quickly, but for traders, it sometimes takes more than 4 months to get it back depending on where your business is registered. Factories and traders use different methods to calculate VAT rebate rate which is really complex. I do not want to get to it in case you feel confused.

Actually for all Chinese exporters, VAT rebate has been already deducted from their profit when they calculate their price. Exporters’ profit margin is not that high. I believe mostly the profit margin in work glove industry is around 10%. That is how the current situation really looks like.

These foreign guys think VAT rebate is an extra profit for exporters because they have not taken competition into account. It was true when the whole industry was at it’s infant stage, in which exporters face few competition and somehow exporters determines the selling price by themselves instead of a competitive market. But right now there is no any industry that is without strong competition. As a buyer, you do not need care about suppliers’ VAT rebate otherwise you will make things complicated, just compare the prices from different suppliers because competition is out there.

So I would like to say to those foreign guys that writes those shit articles, “make a thorough investigation before you start saying something”.