Let’s start with the conclusion: Three key metrics for small-scale operations in 2026

As we enter 2026, the VAT policies for small-scale taxpayers can be summarized in three sentences:

1. Taxable transactions subject to a 3% tax rate shall be taxed at a reduced rate of 1%., advance payments for these projects will also be reduced to 1%, effective for the period ofJanuary 1, 2026, through December 31, 2027(Article 3, Item (3), Subitem 6 of Announcement No. 10 of 2026 issued by the Ministry of Finance and the State Taxation Administration; cited in the August 2026 response from the Inner Mongolia Tax Bureau).
2. The tax threshold for individual taxpayers on a per-occurrence basis has been raised from 500 yuan to 1,000 yuan per occurrence (per day).; Six specific scenarios, such as the leasing of real estate, will now be assessed based on periodic (monthly sales) criteria (Announcement on the Coordination of Value-Added Tax Preferential Policies issued by the Ministry of Finance and the State Taxation Administration in January 2026).
3. Small-scale taxpayers whose monthly sales do not reach the tax threshold will continue to be subject to the current VAT reduction and exemption policies for small-scale taxpayers; the specific amounts shall be determined in accordance with the guidelines of the competent tax authority and the prompts in the filing system.

Please note:The *Value-Added Tax Law* will take effect on January 1, 2026, and the *Interim Regulations on Value-Added Tax* will be repealed simultaneously; however, the transition of preferential policies will be carried out through a special announcement....Companies should not assume that tax incentives have been revoked simply because ”the law has changed,” nor should they automatically rely on figures from previous years.

Pitfall 1: Setting 1% to 3%, or vice versa

There are two common mistakes: First, when the finance department switches invoicing systems, the collection rate is set to 3% by default, and customers only realize the discrepancy after receiving the invoice; second, companies mistakenly believe that ”the higher the tax rate, the more legitimate the business,” so they proactively issue invoices at the 3% rate, effectively paying more tax unnecessarily.

The right approach:

• Before issuing an invoice, in the Electronic Tax Bureau or the invoicing systemAvailable options in the "Confirm Expropriation Rate" column, do not enter them manually;
• For taxable transactions falling under the 1% reduced rate category, the "nominal tax rate" column displays "1%,"Tax reductions and exemptions are reflected in the ”Tax Reduction and Exemption” column; do not write “Preferential Treatment” directly in the remarks section.”.;
• For invoices already issued under the 3% code, do not simply void them on your own; instead, issue a credit memo first and then reissue the invoice, and verify the tax exemption details on the current period’s tax return.

Pitfall 2: Confusing Tax Exemptions, Zero Tax Rates, and the 1% Reduced Rate

These three are completely different concepts, and using them interchangeably will directly affect input tax credits and tax filings:

| Situation | Can a Special Invoice Be Issued? | Can the Downstream Party Claim a Tax Credit? | Typical Scenarios | | — | — | — | — | | Small-Scale Tax Exemption (Below the Tax Threshold) | May waive exemption to issue a special VAT invoice | Deductible at the tax rate stated on the invoice | Customer requests a special VAT invoice | | Taxed at a reduced rate of 1% | Yes | Deductible at 1% | Most transactions subject to a 3% tax rate | | Export zero-rate/ Tax-Exempt | Depends on the specific transaction | Generally not applicable | Cross-border exports |

Key actions: If a downstream customer needs to claim a tax credit, you should proactively ask whether they need a special-purpose invoice—amounts invoiced on a special-purpose invoice are generally no longer eligible for tax reductions or exemptions, so you need to calculate in advance which option is more cost-effective.

Pitfall #3: Focusing Only on VAT and Forgetting About Income Tax, Which Offers Greater Savings

Many small business owners focus only on ”how much VAT they must pay when issuing invoices,” while overlooking corporate income tax. Current policy (effective through December 31, 2027) stipulates:For small, low-profit enterprises, the portion of annual taxable income not exceeding 3 million yuan is calculated at a reduced rate of 25% when included in taxable income and taxed at a rate of 20%, resulting in an effective tax rate of 5%.(Announcement No. 12 of 2023 by the Ministry of Finance and the State Taxation Administration, etc.), and the ”six taxes and two fees” will be levied at half the standard rate.

Enterprises that meet the criteria for small and micro enterprises should simultaneously verify the following:

1. Whether the three indicators—number of employees, total assets, and taxable income—still meet the requirements;
2. Has the option to claim the 50% reduction in the "Six Taxes and Two Fees" been checked on the tax return form?;
3. If there are historical filings where a business ”clearly qualifies as a micro or small enterprise but paid the full advance tax based on the 25% formula,” this can be adjusted through an amended return or the annual tax settlement.

Pitfall 4: The tax threshold for individual customers and occasional purchases has changed

Starting in January 2026,The tax threshold for individual taxpayers on a per-occurrence basis has been raised from 500 yuan to 1,000 yuan per occurrence (per day)., six specific scenarios—including the leasing of real estate—will now be assessed based on periodic (monthly sales) criteria. This has a direct impact on corporate procurement:

• For one-time purchases from individuals where the amount is below the tax threshold, the procedures for issuing invoices on behalf of the purchaser and tax payment can be simplified; however, contracts, payment receipts, and identification information must still be retained;
• For housing leases, please note that following the switch to a monthly sales volume basis, the criteria for determination differ from the previous per-transaction basis,It is recommended to follow the guidelines of the competent tax authority..;
• Don’t skip collecting receipts just because the ”tax threshold has been raised”; without proper documentation, you still won’t be able to claim a pre-tax deduction.

5 Steps for Small-Scale Financial and Tax Self-Inspection in 2026

1. Verify the default collection rates and the settings for the tax exemption and reduction fields in the invoicing system;
2. Assess customer needs regarding special invoices and general invoices, and calculate whether it is cost-effective to forgo the tax exemption;
3. Review the eligibility of small and micro enterprises based on the three indicators and their entitlement to the "six taxes and two fees";
4. Update the list of documents retained for transactions with individuals;
5. Conduct a quarterly reconciliation of ”invoices, ledgers, and financial statements” before filing each quarter to avoid adjustments that span multiple periods.

Qicaiying has a team of professionals specializing in bookkeeping, tax filing, and financial and tax compliance for small, medium, and micro-sized enterprises. We can assist you with reviewing the invoicing criteria for small-scale taxpayers in 2026, ensuring you take full advantage of all available tax incentives for small and micro-sized enterprises, and updating your filing procedures following the implementation of the Value-Added Tax Law.