China's recycling sector awaits clarity on new 'reverse invoice' scheme

The 'reverse charge' invoicing system between China's recycling enterprises, including ferrous scrap processors, and small-scale sellers of waste materials should be fully implemented by the end of this month, the State Administration of Taxation announced at an industry symposium it held on April 9.

Under the reverse charge invoicing mode, recycling enterprises will issue invoices to individual sellers when procuring waste materials, a procedure opposite to the usual practice where those paying for scrap and waste receive invoices from payees.

In commercial activities, after a transaction is completed, it is usually the supplier of products or services that issues a standardized invoice to the buyer, specifying details such as the name of the product or service, quantity, price, tax amount, and other information.

For the buyer, this invoice serves as proof of their legitimate expenditure in business operations. With this proof, according to China's current tax law, a company can legitimately deduct a certain portion of these expenses from the taxable base of income tax that they are required to pay.

In China's recycling industry, however, obtaining invoices for their purchases has always been difficult for domestic waste recycling companies because they often purchase waste resources from individuals or small workshops that do not have the qualifications to issue invoices, market sources observed.

To rectify this situation, the government has introduced multiple measures to help alleviate the tax burden on the recycling industry and other sectors that are faced with similar problems, Mysteel Global learned.

For example, since 2018 under the central government's regulation plan for income tax, companies doing business with individuals are permitted to use alternative transaction documents such as payment records in place of invoices as the income tax deduction voucher.

However, the regulation plan stipulates that if a company uses alternative transaction documents to replace the standard invoice, the corresponding transaction price should be no higher than the VAT threshold, namely a maximum Yuan 5,000 ($704).

"This caused troubles to many recycling companies, as they are usually engaged in transactions for large quantities of waste materials whose value can be quite high," a market analyst based in Shanghai noted. "The amount of a single steel scrap transaction often reaches tens of thousands of yuan," he pointed out.

On the other hand, China's State Administration of Taxation implemented a new income tax rule in June last year, obliging small-scale waste recycling companies to pay tax on at least 8% of their total income at a rate of 25%, which placed heavy burdens on these enterprises, as reported.

Under such circumstances, the implementation of the "reverse charge invoice" policy will help ease the overall tax burden on the country's waste recycling industry, as the invoice issued by the companies can be used as a "compliant and legal deduction voucher" when they pay their income tax, as announced by the tax administration.

In fact, this invoice mode is not a new concept for industries in China, since it is already widely used in the trading of agricultural products and second-hand vehicles where deals are usually concluded between individual suppliers and company buyers, Mysteel Global learned.

Market players are still waiting for more details regarding the new invoice policy on recycling industry to be revealed, Mysteel Global noted.

"There are still some unclear aspects regarding the reverse charge invoice," the Shanghai analyst said. "(For instance,) we don't know whether this invoice can also be used for the deduction of VAT, or whether there will be a restriction on the transaction price," he added. Nevertheless, the policy will undoubtedly have a positive impact on the industry's development, he believed.

The introduction of the new invoice mode will contribute to the further standardization of the waste recycling market, according to the tax administration. The supply of renewable resources will also be more stable as the companies' living costs ease, Mysteel Global understands.

Note: This article has been written in accordance with an article exchange agreement between MySteel Global and BigMint.