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In order to improve the Consumption Tax system and better guiding healthy consumption, the Ministry of Finance, the General Administration of Customs and the General Administration of Taxation issued the Announcement on the Levy of Consumption Tax on Electronic Cigarettes from November 1st, clarifying that there will be a new sub-category created for electronic cigarettes under the tax heading of cigarettes.
This article aims to brief the impacts on matters related to the imposition of Consumption Tax on the electronic cigarettes industry. From a general standpoint, the specific conditions are as follows:
1. Electronic cigarettes are electronic delivery systems used to produce aerosols for vaping. The category includes vape cartridges, vaping devices and e-cigarette products also sold in combinations.
2. Business entities and individuals who manufacture (import) or wholesale e-cigarettes in the People’s Republic of China (PRC) shall be considered as taxpayers of Consumption Tax . In addition, it should be noted that enterprises who have obtained their own e-cigarette trademark shall be responsible for not only for its own trademarked e-cigarettes, but also acting as a manufacturing agent for the e-cigarette production of third parties, the two different trademarked e-cigarettes sales shall be clearly separated; and said enterprises shall only pay Consumption Tax based on the owned trademark e-cigarette sales. If the sales are not clearly separated, the enterprises shall pay the Consumption Tax for all of the sales.
3. A tax rate of 36% will be placed on the production or import of e-cigarettes, while an 11% tax will be placed on the wholesale distribution of e-cigarettes. Previously, vaping devices had only been subject to VAT in China. The taxation policy will further entrench China's once-scattered e-cigarette industry into the state-backed tobacco monopoly, a major generator of tax revenue.
4. China adopts a fixed-pricing approach to e-cigarettes, which simply means that enterprises and individuals engaged in all aspects, such as production, wholesale, and import of e-cigarettes, are required to calculate their Consumption Tax in accordance with the composite assessable value, then apply to regulated Consumption Tax rate.
5. The export tax refund and VAT exemption policy shall be applicable for taxpayers who export e-cigarettes. As over 70 percent of China’s 1,500 e-cigarette producers focus on exports, it should be noted that manufacturers will be eligible for tax rebates and exemptions if they sell their e-cigarette devices overseas.
The introduction of the Consumption Tax on vaping devices is part of a series of measures taken by the PRC Government over the past years to align the new emerging industry with traditional tobacco products; notably, the application of taxes will significantly impact production and operational costs. As a result, the price of e-cigarettes is likely to increase, which could also lead to a reduction in domestic demand, in line with the general purpose of “tobacco control”.
At PHC Advisory, our team is constantly monitoring the most recent tax and exemption policies in China. Feel free to reach us at info@phcadvisory.com to find out more about preferential policies in China that your company could benefit from.
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