Accounting Treatments of Consumption Tax - 1994

Promulgated Dec.28,1993; Effected Jan 1,1994

Provisional Regulations of the people's Republic of China on Consumption Tax has been promulgated by the State Council. The provisions concerning the accounting treatments are stipulated as follows:

1. Enterprises which are subject to Consumption Tax should add an itemized "Consumption Tax payable" account under the account titled "Taxes payable" for accounting and recording purposes.

2. Enterprises selling consumer goods produced that are subject to Consumption Tax shall debit the amount of Consumption Tax payable in the account titled "Product sales tax and surtax" and credit the account titled "Taxes payable -Consumption Tax payable ". When Consumption Tax is actually paid , debit the account titled "Taxes payable-Consumption Tax payable " and credit the account titled "Cash in bank", For return of goods sold or refund of tax, accounting entries to the contrary shall be made.

Taxable consumer goods exported by enterprises. if not enjoying tax exemption nor refund of tax according to the regulations, shall be treated as domestic sales and the accounting records shall be made in accordance with the provisions of the preceding paragraph.

3. For Consumption Tax that shall be paid in accordance with the provisions by enterprises which provide self-producing taxable consumer goods as investment, shall debit the account titled "Long-term investment" and credit the account titled "Taxes payable-Consumption Tax payable".

Enterprises which exchange self-producing taxable consumer goods for means of production , means of consumption, settlement of debts, or as handling fee for purchases, etc. shall be regarded as sales for accounting purposes, Consumption Tax that shall be paid in accordance with the provisions shall be accounted for in accordance with Item 2 of these provisions.

For Consumption Tax that shall be paid in accordance with the provisions by enterprises using self-producing taxable consumer goods on construction-in-process, non-productive institutions and other fields, it shall debit the accounts titled "Fixed assets", "Construction-in-process", "Non-operating expenditures", "Product sales expenses" etc. and credit the account titled "Taxes payable-Consumption Tax payable".

For Consumption Tax that shall be paid in accordance with the provisions on packaging materials that are sold together with products but priced separately, it shall debit the account titled "Other business expenditures" and credit the account titled "
Taxes payable-Consumption Tax payable". For Consumption Tax that shall be paid in accordance with the provisions on the deposits on packaging materials that are not returned at due time, it shall debit the accounts titled "Other business expenditures
", "Other payables", etc. and credit the account titled "Tax payable-Consumption Tax payable.

When Consumption Tax is actually paid by the enterprises, debit the account titled "Taxes payable-Consumption Tax payable " and credit the account titled "Cash in bank".

4. For taxable consumer goods under contract processing that are liable to Consumption Tax, the tax amount shall be withheld and paid by the consignee at the time when the consignor received the processed goods. The consignee shall debit the accounts titled "Accounts receivable ", "Cash in bank", etc. and credit the account titled "Taxes payable-Consumption Tax payable", based on the amount of tax to be withheld, When the taxable consumer goods under consigned processing are received and for direct sale , the consignor shall record the Consumption Tax withheld and paid by the consignee as the cost of the taxable consumer goods, debit the accounts titled "Materials for consigned processing", "Production Cost", "Self-made semi-finished products", etc. and credit the accounts titled "Accounts payable", "Cash in bank", etc. When taxable consumer goods under contract processing are received and used for consumption of taxable consumer goods, debit the account titled "Taxes payables-Consumption Tax payable" and credit the accounts titled "Account payable", "Cash in bank", etc. based on the Consumption Tax that shall be withheld and paid by the consignee and accordance with the provisions.

5. The Consumption Tax paid for imported taxable consumer goods shall be included in the cost of the said consumer goods by debiting the accounts titled "Fixed assets", "Goods purchased", "Materials purchased", etc. and credit the account titled "Cash in bank ", etc.

6. Taxable consumer goods for export that are exempt from Consumption Tax shall be accounted for in accordance with the different circumstances:
a. Production enterprises which directly export taxable consumer good or export taxable consumer goods through foreign trade enterprises and which directly enjoy tax exemption in accordance with the provisions, do not need to calculate the Consumption Tax to be paid.

b. In the case of exporting taxable consumer goods through foreign trade enterprises that , if in accordance with the provisions, must go through the procedure of paying tax first and refund it later, the following measures shall be followed for accounting treatments:

(i) Production enterprises which entrust foreign trade enterprises to export their taxable consumer goods shall debit the account titled "Account Receivable" and credit the account titled "Taxes payable -Consumption Tax payment" based on the amount of Consumption Tax payable at the time of computing the Consumption Tax. When the Consumption Tax is actually paid, debit the account titled "Taxes payable -Consumption Tax payable " and credit the account titled "Cash in bank". When the tax refunded if received from the foreign trade enterprises for the taxable consumer goods exported, debit the account titled "Cash in bank " and credit the account titled "Accounts Receivable". For the amount of refunded tax that shall be repaid as a result of rejection by the customs or return of goods, accounting entries to the contrary shall be made.

When foreign trade enterprises engaged as export agents of taxable consumer goods receive Consumption Tax refunded by tax authorities to production enterprises after the taxable consumer goods have been exported, debit the account titled "Cash in bank "and credit the account titled "Accounts receivable". When this tax is refunded to the production enterprises, debit the account titled "Account payable " and credit the account titled "Cash in bank". For the amount of refunded Consumption Tax that shall be repaid as a result of the rejection by the customs or return of goods, debit the account titled "Account receivable-Consumption Tax payable by production enterprises", credit the account titled "Cash in bank ". When the tax has been refunded by the production enterprises, accounting entries to the contrary shall be made.

(ii) For production enterprises that sell taxable consumer goods to foreign trade enterprises and the foreign trade enterprises export on their own, the Consumption Tax payable shall be dealt with in accordance with item 2 of these provisions.

Foreign trade enterprises exporting taxable consumer goods on their own shall , at the time of applying for refund of Consumption Tax after the taxable consumer goods have been declared to the customs and exported, debit the account titled "Receivable of tax refunded on exports" and credit the account titled "Cost of goods sold". When the tax refunded on export of taxable consumer goods is actually received, debit the account titled "Cash in bank" and credit the account titled "Receivable of tax refunded on exports", For the amount of refunded Consumption Tax that shall be repaid as a result of rejection by the customs or return of goods, accounting entries to the contrary shall be made.