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The Differences Between the Zero Rate, Tax Exemption, and Tax-free of VAT

When taxpayers issue the VAT common invoices, how to correctly choose the right rate for the zero rate, tax exemption and tax–free of VAT? Please see below explanation.

1. ZERO VAT RATE

Zero rate is one of the legal rates of VAT. When taxpayers sell the goods or provide the services or transfer of intangible assets, they have obligation to pay tax. However, the rate is zero. So, no tax should be paid.

Since the taxpayers have obligation to pay tax, they also have the right to deduct the input VAT. So, after taxpayers get the VAT special invoice and certify it, the tax bureau will return the input tax paid. One typical situation refers to the zero tax on the exporting of goods and service; meanwhile, the taxpayer can enjoy the tax refund of input tax.

Key points:
a) Zero tax
b) Input VAT can be deducted
c) Input VAT can be refunded

Exception:
If taxpayers use a simplified method for calculating the tax payable, the VAT rate is zero but the input VAT cannot be deducted or refunded.

Invoice Issuance:
Choose the zero rate in the invoice issuance system and do not choose the tax preference.

2. TAX EXEMPTION

Tax exemption means taxpayers have obligation to pay VAT. However, according to National Policy, the obligation has been exempted in selling goods and providing service. At the same time, the input VAT cannot be deducted.

Key Points:
1. Zero tax
2. Input vat cannot be deducted
3. Input vat cannot be refunded

Invoice Issuance:
When setting the product code and rate in invoicing system, choose the "tax preference" and then choose the "tax exemption".

Exception:
If the invoice is the "Uniform invoice for motor vehicle sales" and it conforms to tax exemption, choose the zero rate for invoice issuing.

3. VAT-free

Not all the income of taxpayers belongs to VAT taxable income. Such incomes comprise government subsidies, interest on deposits and insurance claims, etc. Generally, except some special regulations, most non-VAT taxable income can be issued with common invoices.

Invoice issuance:
When setting the product code and rate in the invoicing system, choose the "tax preference" and then choose the "tax-free".

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