(Yicai) Feb. 6 -- Starting this year, Chinese authorities are bringing forward the timing of Value Added Tax payments for businesses that collect payment before providing services in a move that will require firms to pay tax more promptly and could impact their tax status.

In everyday life, many service industries, such as property management firms, education and training companies, beauty and hair salons as well as gyms, typically collect money upfront and then deliver the services in stages over time.

Under new VAT rules recently released by the Ministry of Finance and the State Taxation Administration, when a taxpayer collects payment in advance for services that it provides at a later date, the VAT liability will now be due on whichever comes earlier, the actual start date of the service or the date specified in the contract. Taxpayers must declare and pay VAT on the full amount received.

The change will have a major impact on industries such as property management, education and training, as well as beauty and hair care that commonly collect fees and top-ups in advance, said Ge Yuyu, an associate professor at the Shanghai National Accounting Institute. In the past, after customers paid or topped up their balance, most companies did not pay VAT immediately if an VAT invoice had not been issued. Instead, they would spread the prepaid income over the entire service period and pay VAT gradually. Starting this year, they will need to pay tax on this income much earlier.

Another potential impact of the new policy is that it may affect a company’s tax status. For businesses that collect payment before providing services, the need to recognize the full amount of revenue earlier could push them over the VAT threshold. If the fully recognized revenue exceeds the CNY5 million (USD720,500) threshold for small-scale VAT taxpayers, the business would be required to switch to general VAT taxpayer status and be subject to different tax rates, Ge said.

Editor: Kim Taylor