Second, farms and cloth factories can be established as independent legal persons. The cotton purchased by the cloth factory from the farm can be deducted from the value-added tax of 13%. Cotton sold on farms can be exempted from VAT.
Policy basis: Article 16 of the Provisional Regulations on Value-added Tax in People's Republic of China (PRC) stipulates that agricultural producers are exempt from value-added tax when selling their own agricultural products. The detailed rules for implementation further specify that agriculture as mentioned in the regulations refers to planting, aquaculture, forestry, animal husbandry, aquaculture and agricultural producers, including units and individuals engaged in agricultural production. In other words, units and individuals directly engaged in planting, aquaculture, forestry, animal husbandry and aquaculture are exempt from value-added tax when selling their own primary products.
The Notice of the Ministry of Finance of People's Republic of China (PRC), State Taxation Administration of The People's Republic of China, on Improving the Input Tax Deduction Rate of Agricultural Products (Caishui [2002] 12) stipulates that the input tax deduction rate of duty-free agricultural products purchased by agricultural producers will be increased from 1 0/day in June 2002.
The Notice of State Taxation Administration of The People's Republic of China, Ministry of Finance of People's Republic of China (PRC) on the Deduction Rate of Agricultural Products Input Tax of Small-scale General VAT Taxpayers (Caishui [2002] 105) stipulates that general VAT taxpayers can purchase agricultural products from small-scale taxpayers in accordance with the Notice of State Taxation Administration of The People's Republic of China, Ministry of Finance of People's Republic of China (PRC) on Improving the Deduction Rate of Agricultural Products Input Tax (Caishui [2002] 12).