As mentioned in my last post, the reform of the tax-sharing system created two taxation organizations in 1994. Inspired by the fiscalization experiences in Italy and Greece, the finance ministry began to adopt fiscalizaiton in China to fight against the increasing tax fraud behaviors. There were a lot of taxpayers provided the handwritten invoice with fake amount and virtual business activity to reduce taxes, Also, more and more taxpayers started to collect or buy the VAT invoice as VAT input to deduct the VAT output. While the Sales Tax invoice can be collected for raising business costs to reduce the income tax. In conclusion, people already treated invoices as money!!
Before rolling out the fiscalization system, the government started a special solution for controlling the invoice itself. Why can’t they adopt the anti-counterfeiting technology used in the banknote since the invoices had been treated as money? So they published a new regulation of the invoices standard, which included the following mandatory requirements:
- All of the invoices should be printed on the legal paper notes, which was called the blank invoice without sales information.
- The blank invoice can be only applied from the tax authority, which was the same as the banknote issued by the central bank
- A unique serial number must be pre-printed on each blank invoice, to indicate the unique ID of each transaction. Just like the serial number on the banknote.
- Every taxpayer must issue legal invoices by printing the sales data on the blank invoices using authorized fiscal devices.
- The taxpayers should apply for invoice serial numbers from the tax authority by means of a range of sequential IDs with start No. and end No. For instance: 1~100, 200~300. which was also called the invoice IDs ranges. After that, they had to get the corresponding blank paper invoices with pre-printed Invoice ID on them.
- The taxpayer must print the matched Invoice ID on the blank invoice by fiscal devices. So there will be a process for importing the applied invoice ID ranges to the fiscal device, which was completed by the secure elements such as the smart cards, or other HSMs. The applied invoice ID ranges will be downloaded to the secure element for importing in the fiscal devices
- Each fiscal device must generate a checksum based on the key features in the sales information, which includes the buyer’s TIN, seller’s TIN, invoice ID, issuing time, the total amount and the authorized SN for this fiscal device. The checksum was called fiscal code like the IKOF of fiscal invoice used in Montenegro. It must be printed at the bottom of each invoice for verification and tamper-proof
- To maximum the tax control performance, the government set a lot of limitations on the invoices issuing process, such as the blank invoices holding quantity, single invoice quota, the maximum credit amount. All these tax control limitations must be downloaded to the taxpayers’ smart cards for the fiscal device initialization
Based on the rules of the invoices, the two taxation organizations began to design diverse blank invoice layouts according to the taxpayer’s sector and turnover scale
For the VIMS (VAT Invoice Management System), there were two mainstream VAT invoices called: VAT special Invoice and VAT common invoice. The VAT special invoice was the traditional VAT invoice that can be used for VAT input deduction. It was only applied to VAT taxpayers whose annual turnover reaches 1,800,000 RMB with a VAT tax rate of 17%. The taxpayers with annual turnover below the limitation were called small-scale taxpayers. They can only issued the VAT common invoice with a low tax rate at 3% or 1%. Moreover, the VAT common Invoices can’t be used for VAT input deduction because of the low rate financial incentive. The sectors that werew eligible to issue VAT invoices include manufacture, agriculture, repair service and wholesales.
For the STIMS(Sales Tax Invoice Management System), the taxpayer can only apply for Sales Tax blank invoices from the local tax authority. If your business belonged to one of the sectors like restaurant, hotel, entertainment and retailer, you needed to issue sales tax invoice without any deduction.
It was more flexible for issuing sales tax invoices as each local tax authority can customize its own STIMS and invoice layouts under the basic invoice rule. So, There are a lot of localized STIMSs that appeared among the provinces in China, even for some special sectors. You would get kinds of paper invoices issued by these STIMSs, some were printed on roll invoices, some were printed on plain invoices.
The large demand for fiscalization in the market encouraged a set of fiscal solution providers.You might get three fiscal smart cards/ Ukeys for three localized STIMS. Some new technologies were introduced by the fiscal solutions providers during this period for competing. It was the best of times for the fiscalization in China as the huge demands drove the technology innovation year by year!
If you are a group owner who had businesses that belong to both VMS and STIMSs among provinces, you needed to comply with the fiscalizaiton rules designed by different organizations. This means that you need not only purchase the fiscal devices for VAT and Sales invoice issuance, but also handle the complex tax return work for different tax authorities. It was also the worst time for taxpayers to handle the invoicing work, right?
Based on the redefined invoice standard, a lot of solutions were developed by these fiscal service providers. we plan to talk about them in our next post. Keep following www.hengweismart.com for updates!
Hengwei Fiscal Solution is working on providing the best solutions for taxpayers all over the world. please access our website for more news and solutions that you’re interested. Now we are looking for local partners in Fiji, Samoa and Serbia as sales proxies. Don’t hesitate to contact us!!!
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