Editor's Note: On January 1, 2026, to facilitate the implementation of the Value-Added Tax (VAT) Law and its implementing regulations, the State Taxation Administration promulgated the *Announcement on Relevant Matters Concerning the Registration and Management of General VAT Taxpayers (Announcement No. 2 of 2026)* and its official interpretation. The relevant provisions concerning small-scale taxpayers have been adjusted in areas such as qualification criteria, the timing of status change, and the treatment of tax recovered from audits. These changes are expected to impact entities across multiple industries, including the vast number of micro and small enterprises, individual businesses, and partnerships. This article provides a brief analysis.

 

 Change 1: Enterprises, Individual Businesses, and Partnerships with Annual Sales Exceeding 5 Million Yuan Can No Longer Opt for Small-Scale Taxpayer Status

 

1. Difference Between Old and New Rules

The new rules maintain the threshold of 5 million yuan in annual taxable VAT sales for distinguishing between small-scale and general taxpayers. The key change lies in the option to continue as a small-scale taxpayer after exceeding this threshold.

 

Under the provisions of Cai Shui [2016] No. 36, entities or individual businesses whose sales exceeded the standard (5 million yuan at the time) and were considered "not regularly engaged in taxable activities" could choose to continue filing as small-scale taxpayers. According to the 2026 new rules, registration as a general VAT taxpayer has become a legal obligation for enterprises (including companies, partnerships, etc.) and individual businesses with annual sales exceeding 5 million yuan. The only exception is strictly limited to "non-enterprise units" (e.g., public institutions, social organizations, etc.), which must also simultaneously meet the two conditions of "not regularly engaging in taxable transactions" and "whose main business is not within the scope of taxable transactions." In essence, for ordinary enterprises and individual businesses, once annual sales continuously exceed 5 million yuan, they must register as general taxpayers, eliminating the previous option.

 

2. Main Impact and Guidance

(1) For industries with a high proportion of labor costs (e.g., technology and service enterprises like software development, consulting, design):

These enterprises typically have relatively limited deductible input VAT credits. After converting to general taxpayer status, if they cannot obtain sufficient input VAT invoices for deduction, they may face pressure from increased tax burden and need to make corresponding considerations in pricing and cost management.

 

(2) For industries with fragmented upstream procurement (e.g., renewable resource recycling, construction engineering):

Individual businesses within these sectors often struggle to obtain compliant deductible vouchers from upstream individuals or scattered suppliers. The core challenge posed by the new rules is that if they convert to general taxpayer status due to reaching the sales threshold, they must apply the audit-based collection method. This sets clear requirements for bookkeeping management, standardizing procurement, and obtaining compliant deductible vouchers. Failure to address this effectively will directly lead to a heavier tax burden. Therefore, these operators essentially need to weigh two paths:

*   Path One: Control scale to maintain small-scale taxpayer status. By keeping annual sales below 5 million yuan, they can continue to apply small-scale taxpayer policies. However, if not handled properly, this approach carries the risk of triggering issues like fraudulent invoicing or tax evasion.

*   Path Two: Standardize management to cope with general taxpayer status. This means they must establish standardized procurement processes and strive to obtain compliant invoices for input VAT deduction to meet the requirements of audit-based collection.

 

 Change 2: Timing of Taxpayer Status Conversion Becomes Effective in the Current Period, Requiring Attention to Declaration Linkages

 

1. Difference Between Old and New Rules

The provisions regarding when general taxpayer status takes effect differ between the old and new rules, eliminating operational gaps that may have existed in past practice.

 

According to the 2018 *Measures for the Registration and Management of General VAT Taxpayers*, taxpayers must complete registration within 15 days after the end of the declaration period for the month (or quarter) in which their annual taxable sales exceeded the standard. They could also choose for the general calculation method to apply from the 1st of the month of registration or the 1st of the following month. In practice, some taxpayers might delay applying for general taxpayer status by not registering promptly.

 

According to the *VAT Law Implementation Regulations* and Announcement No. 2 of 2026, the effective date of general taxpayer status is fixed and is no longer affected by when the taxpayer completes registration. As long as a taxpayer's annual sales exceed the standard, the effective date of their general taxpayer status is "the first day of the period in which the standard was exceeded." This means tax treatment will be applied retroactively automatically, and relevant entities can no longer gain a buffer period by delaying registration.

 

2. Main Impact and Guidance

This adjustment means the timing of status conversion is no longer linked to the entity's active registration action. Relevant entities need to adapt to stricter rules.

(1) For routine business: Effective immediately upon triggering, pay attention to declaration linkage.

Under the new rules, once sales exceed 5 million yuan within any rolling 12-month period, general taxpayer status is deemed effective from the first day of the period in which the standard was exceeded. For example, consider a wholesaler/retailer filing quarterly. Suppose its cumulative sales by October 2026 did not exceed 5 million yuan, but its cumulative sales by November 2026 did exceed 5 million yuan.

*   Under the 2018 Measures, it could continue filing VAT for Q4 2026 as a small-scale taxpayer and choose to convert to a general taxpayer in January or February 2027.

*   Under the 2026 new rules, its general taxpayer status becomes effective from November 1, 2026. The enterprise would need to file in December 2026, declaring October taxes under the small-scale taxpayer method and November taxes under the general taxpayer method. From January 2027 onward, all filings would be as a general taxpayer. If any periods after the effective date were already filed as a small-scale taxpayer, corrections would be required, potentially involving supplementary tax payments.

 

(2) For specific transactions: The completion timing may affect the applicable tax rate.

For occasional large asset transfers (e.g., share disposals), due to the new effective date rule, the completion time of the transaction may directly impact the applicable tax rate and calculation method. A typical scenario involves listed company shareholding platforms.

*   Under the old system, most such platforms were small-scale taxpayers. After disposing of shares, they generally would not proactively register as general taxpayers. Therefore, before registering as such, the income from share disposals would still be subject to VAT at the levy rate.

*   Under the 2026 new rules, if the share disposal causes the annual taxable sales to exceed 5 million yuan, their general taxpayer status will be retroactively effective from the first day of the period in which the standard was exceeded. This specific disposal would then be taxed at the general taxpayer rate, potentially significantly increasing the tax burden.

 

Under the new rules, the effective timing for status conversion is clearer and occurs earlier. Relevant entities need to monitor their sales more promptly and factor in the potential tax impact of status conversion when planning large transactions.

 

 Change 3: Inclusion of Audit-Recovered Sales into Their Original Periods, Leading to Taxpayer Status Changes, Significantly Increases Non-Compliance Costs

 

The new rules provide more explicit and stringent stipulations on how to handle sales amounts recovered from tax audits compared to previous regulations.

 

1. Difference and Continuity Between Old and New Rules

First, it is important to clarify that including "audit-recovered sales" in "annual taxable sales" is not an innovation of these new rules. According to Article 2 of the 2018 *Measures for the Registration and Management of General VAT Taxpayers*, annual taxable sales explicitly include "audit-recovered sales." The change lies in the treatment method:

*   Under previous rules, while audit-recovered sales needed to be included in annual sales, they were typically used to assess whether the registration obligation was triggered in the *period when the recovery was made*. They generally did not lead to a retroactive change in the taxpayer's status for historical periods.

*   According to Announcement No. 2 of 2026, audit-recovered sales must be allocated back to and recalculated within their corresponding original tax periods based on when the tax liability arose. This can lead to a retroactive determination of taxpayer status for historical periods.

 

Consider a recent case as an example: A trading firm hid approximately 100 million yuan in sales proceeds through personal bank accounts. Upon investigation, the tax authority, applying the rules at the time, required it to pay about 680,000 yuan in back VAT as a small-scale taxpayer (calculated at a reduced levy rate of 1%).

*   Under previous rules: This 100 million yuan in recovered sales would be treated as sales in the period of recovery. The outcome would be as above, generally without retroactively changing its historical taxpayer status.

*   Under a hypothetical application of the new rules: This 100 million yuan would need to be precisely allocated back to the actual years it occurred. If, after this reallocation, the cumulative sales for any 12-month period within a particular year far exceeded 5 million yuan, the trading firm should have been recognized as a general taxpayer from the first day of the period in which it exceeded the standard in that year. This means the firm could not simply pay back taxes at the 1% levy rate. Instead, it would need to recalculate and declare tax for all sales in the relevant period(s) using the general taxpayer method, leading to a completely different outcome.

 

2. Main Impact and Guidance

The key implication of this adjustment is that it alters the potential consequences of historical tax issues. Under previous rules and practice, the handling was typically limited to recovering unpaid tax, late payment fines, and penalties. Under the new rules, if the tax authority, during a review, reallocates audit-recovered sales back to their corresponding periods and this causes the sales in that period to meet the threshold, it may lead to a retroactive determination of taxpayer status. This would require the entity to recalculate and pay taxes for multiple past periods, increasing the steps and potential tax liability involved in resolving historical issues.

 

Based on the principle that laws should not have retroactive effect, the new rules include a transitional clause: for adjustments to sales in tax periods belonging to 2025 or earlier due to audits or self-corrections, the effective date of general taxpayer status shall be no earlier than January 1, 2026.

 

In light of this, relevant entities should respond proactively.

*   For enterprises with a history of incomplete income reporting or use of irregular methods like personal account receipts, such as some in livestreaming entertainment, e-commerce, or high-income personal studios, they should seize the transitional window. They should proactively review historical accounts (paying special attention to risk points like personal account receipts and unreported income) and utilize self-inspection and correction policies to resolve risks.

*   For all market entities, the new rules substantially raise the potential cost of behaviors like hiding income, using personal accounts for receipts, or using shell entities for tax avoidance. Future non-compliant behavior, once investigated, may not only require payment of evaded taxes but could also trigger status retroactive determination and tax adjustments, potentially making the endeavor counterproductive. Establishing a compliant financial and tax system is the only sustainable operational path.

 

 Summary

In summary, the adjustments to the rules for small-scale taxpayers mainly involve three changes:

1.  Entities exceeding the threshold must register as general taxpayers, narrowing the scope for choice.

2.  The effective timing for status conversion is more definite, requiring attention to declaration linkages.

3.  Audit-recovered taxes require calculation based on allocation to their original periods, making the treatment method stricter.

 

These changes present new requirements for relevant entities:

*   For enterprises, individual businesses, and partnerships with sales approaching 5 million yuan, advance planning is needed to assess the impact of converting to general taxpayer status.

*   For entities with plans to dispose of assets (e.g., shareholding platforms), the potential tax burden differences arising from the timing of the transaction must be considered.

*   For all relevant entities, it is essential to keep timely track of their sales situation, prioritize tax compliance, and investigate new risks arising from historical issues.