The VAT carryforward refund affects cash flow, not the total tax burden.

During the equipment procurement and inventory stocking phases, a company’s input tax often exceeds its output tax; this difference constitutes the end-of-period tax credit. In the past, this amount could only be carried forward on the books to be offset at a later date, effectively requiring the company to advance funds. The tax credit refund mechanism allows eligible general taxpayers to recover this amount in advance.

I’d like to clarify one point:VAT carryforward refunds do not reduce a company’s total VAT liability....it simply brings forward the timing of the deduction. However, it has a very direct impact on cash flow for capital-intensive industries with long turnover cycles (such as those involving new production lines, large inventories, and long export tax refund cycles).

The tax refund rules differ for the three categories of taxpayers.

According to the guidelines published by the tax authorities in their FAQ section, starting with the VAT filing period in September 2025, eligible general VAT taxpayers shall follow the procedures below (specific applicabilityThe interpretation of the competent tax authority and the latest announcements shall prevail.）：

• Manufacturing; Scientific Research and Technical Services; Software and Information Technology Services; Ecological Conservation and Environmental ManagementTaxpayers in these four types of industries mayMonthlyThere is no prerequisite requirement of six consecutive months when applying to the competent tax authority for a refund of the ending input tax credit.
• Real Estate Development and ManagementTaxpayers whose new carryover tax credits at the end of each of the six consecutive months (or two consecutive quarters for those filing quarterly) prior to applying for a refund are greater than zero, compared to the carryover tax credit balance as of March 31, 2019, and provided that the new credit balance for the sixth month is no less than 500,000 yuan, may apply for a refund of 60% of the new credit balance for the sixth month.
• Other TaxpayersIf, prior to applying for a tax refund, the carryover tax credit balance at the end of each of the preceding six consecutive months is greater than zero, and the new carryover tax credit balance in the sixth month is no less than 500,000 yuan, a proportional refund will be granted: the refund rate is 60% for the portion of the new carryover tax credit balance not exceeding 100 million yuan, and 30% for the portion exceeding 100 million yuan.

All four conditions must be met simultaneously.

1. Tax and fee payment credit rating of Grade A or Grade B;
2. The applicant has not been involved in any instances of fraudulently obtaining input tax credit refunds, fraudulently obtaining export tax refunds, or issuing fraudulent special VAT invoices during the 36 months prior to applying for the tax refund;
3. The applicant has not been penalized by the tax authorities for tax evasion two or more times in the 36 months prior to applying for a tax refund;
4. Effective April 1, 2019, entities are no longer eligible for the VAT “immediate collection and refund” or “collection first, refund (or return) later” policies (unless otherwise specified).

Rule No. 1 is the one most often overlooked. Companies whose credit rating has dropped to Class M, C, or D are ineligible to apply, no matter how large their unclaimed tax credit balance may be. This is why it’s important to ensure compliance with routine tax filings and settle any tax arrears well in advance.

Four Steps for Foreign Trade Companies to Conduct Cost Estimates

• Step 1: First, determine the industry classification. Industry classification is based on the National Economic Industry Classification; a company is not automatically classified as part of the software and information technology services sector simply because its name includes the words ”technology.” Incorrect classification is a common reason for reports being returned for resubmission.
• Step 2: Calculate the new carryforward credit. Determine whether the threshold of 500,000 yuan has been exceeded by subtracting the carryover tax credit balance at the end of the base period (December 31 of the previous year) from the carryover tax credit balance at the end of the current period.
• Step 3: Compare the four criteria. In particular, regarding credit ratings and the history of participation in the “collect-and-refund” policy, if an application for the “collect-and-refund” policy for software products is submitted at the same time, it is necessary to determine whether there is a conflict.
• Step 4: Incorporate the tax refund cycle into your cash flow plan. There is a time lag between submitting an application and the receipt of tax funds. Therefore, inventory preparation and payment arrangements should be planned by working backward from the actual receipt date, rather than based on the submission date.

Two Common Pitfalls

First, the accounting treatment after a tax refund. Upon receipt of the tax refund, the input tax must be reversed in accordance with regulations. If it is directly deducted from costs or recorded as non-operating income, it will be deemed an accounting error during subsequent audits.

Second, obtaining invoices at the last minute during the application period. Tax authorities pay close attention to the authenticity of input invoices submitted by companies applying for input tax credit refunds; procurement contracts, payment documents, shipping documents, and inventory receipt records must form a complete cycle. A tax refund is not a shortcut to ”turning book figures into cash”; the authenticity of business transactions is the bottom line.

Qicaiying can assist enterprises in conducting eligibility assessments for input tax credit refunds, credit rating evaluations, and the preparation of application materials. Specific policy guidelines are subject to the announcements issued by the Ministry of Finance and the State Taxation Administration, as well as the implementation requirements of the competent tax authorities.