China realigns VAT in domestic ferrous scrap policy

China's Ministry of Finance and State Administration of Taxation, in an attempt to further promote sustainable development of the scrap industry, recently revised the earlier Announcement No. 40 (2021) of the Ministry of Finance and the State Administration of Taxation (Announcement 40).

In the new "Announcement on Improving the Value-Added Tax Policy for Comprehensive Utilization of Resources", China clarified that the new value added tax (VAT) policy for comprehensive utilization of resources will be implemented from March 1, 2022. Eligible enterprises in the ferrous scrap business can be refunded at 30%.

What are the major changes in Announcement No. 40 compared with the original value-added tax policy? What impact will it have on the development of the ferrous scrap and entire steel industry?

The choice of tax calculation method for taxpayers of renewable resource recycling has been added.

General VAT taxpayers in the ferrous scrap industry can either opt for the simple tax calculation method to pay VAT at the rate of 3%, or the general tax calculation method.

How are the two tax calculation methods different and what are the implications?

The simple tax calculation is based on 3% of the tax-free sales, and the input invoice cannot be deducted; while the general tax calculation method is based on the output tax of 13% of the value-added part of the input tax.

Taxpayers in the ferrous scrap recycling, processing and trade can choose the simple tax calculation to reduce their tax burden. Of course, certain criteria will have to be fulfilled.

These players can choose the simple tax calculation and issue 3% VAT invoices.

For enterprises that meet the criteria of the Ministry of Industry and Information Technology for scrap steel processing, because they can enjoy the policy of immediate refund and collection, can accept 3% VAT invoices to a certain extent, and issue 13% output invoices, and the value-added tax can enjoy immediate collection.

However, for steel mills, since the sales of finished products attract a 13% sales invoice, if the input invoice is 3%, the value-added tax will increase significantly, and the cost of the steel mill will inevitably increase, or it will be passed on to ferrous scrap by reducing its purchase price.

Stress on physical properties of "renewable resources"

The term "renewable resources" as mentioned in this announcement refers to various wastes that are generated in the process of social production and consumption and have lost all or part of their original use value. After recycling and processing, they can regain their use value. Among them, processing is limited to simple processing such as cleaning, selection, crushing, cutting, dismantling, packaging, etc to change the physical properties of renewable resources such as density, humidity, length, thickness, softness and hardness.

The emphasis now is on treatment of the physical properties, including the simplest of processing operations, such as selection and cleaning.

It is stipulated that those who violate the laws of financial returns and refunds will be held accountable.

Finance and related departments which violate laws and regulations and give financial returns, rewards and subsidies to taxpayers in the renewable resource recycling business will be investigated.

These changes are expected to present scrap processors with two choices:

In the first case, the supplier is required to deliver all the goods with invoices, choose the simple tax calculation method, and issue a 3% VAT invoice to the steel mill. In this case, the tax cannot be refunded, and the steel mill faces an additional 10% VAT cost, although the purchase price adjustment can be used. But there is no preferential treatment. Therefore, the steel mill will probably not be willing to accept the 3% invoice.

In the second case, the scrap processing access enterprise can require the supplier to set up a recycling company to supply the goods with a ticket, or set up a recycling company to receive the goods from the supplier, and require the supplier to bring the ticket as an individual industrial and commercial or a small-scale taxpayer. Suppliers and recycling companies choose the simple tax calculation method, issue 3% of the invoices for sales to the access companies, and the access companies issue another 13% of the invoices to the steel mills on the standard list, and the tax rebate is 30%, so the steel mills can enjoy most of the benefits of tax rebates through price adjustment, and may become the choice of most steel mills.

Scrap steel is an important ferrous raw material. Using 1 tonne of scrap to produce 1 t of steel can save 1.65 t of iron ore, reduce energy consumption by 350 kg of standard coal, use 1.7 t of new water, reduce 1.6 t of CO emissions and 3 t of solid waste emissions.