On April 17, the State Taxation Administration publicly exposed eight tax evasion cases involving consumption tax investigated and handled by local tax authorities in recent years, six of which involved consumption tax evasion in the retail of gold jewelry. This sends a clear signal that the state is strengthening supervision over the gold jewelry industry and the consumption tax. In addition to consumption tax, the gold jewelry retail industry also faces significant tax risks in invoice management. This article analyzes the tax risks and preventive measures in respect of consumption tax on gold jewelry retail and invoice management for readers’ reference.

I. Tax Risks and Prevention of Off-Book Operations and Concealment of Income

(I) Tax Risks of Off-Book Operations and Concealment of Income

According to the publicly disclosed case information, some jewelry stores fail to record and declare gold and silver jewelry sales income for tax purposes in accordance with the law, and instead conceal income through off-book operations without filing tax returns. Such practices include receiving payments through personal accounts, settling operating funds collected via third-party payment platforms into personal accounts, conducting "public-private diversion" of sales funds through third-party payment platforms, and transferring large amounts of corporate income to employees’ personal accounts, all of which constitute income concealment.

Pursuant to the current Interim Regulations on Consumption Tax, gold and silver jewelry, platinum jewelry, diamonds and diamond jewelry, as well as other precious jewelry and jade articles are taxable consumer goods. Among them, consumption tax on gold and silver jewelry, platinum jewelry, diamonds and diamond jewelry is levied at the retail link at a rate of 5%, while consumption tax on other precious jewelry and jade articles is levied at the production, consigned processing or import link at a rate of 10%. Therefore, retail sales of gold and silver jewelry are subject to both value-added tax (VAT) and consumption tax obligations. Regardless of whether a retailer is a company, an individually-owned enterprise or an individual industrial and commercial household, it shall pay VAT, consumption tax and income tax in accordance with the law.

Pursuant to Article 63 of the Tax Collection and Administration Law, concealing income to avoid or underpay taxes constitutes tax evasion. Tax authorities may recover underpaid VAT, consumption tax and income tax from off-book operations, impose surcharges for late payment, and impose a fine of 0.5 to 5 times the underpaid tax amount. If a gold and silver jewelry retailer is a small-scale taxpayer, it shall make supplementary VAT payments on off-book sales under the simplified taxation method. If it is a general taxpayer, it shall in principle adopt the general taxation method; if it fails to obtain input invoices for off-book sales, it faces the risk of supplementary tax payment at the 13% tax rate on the full sales amount.

Pursuant to Article 201 of the Criminal Law and the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases Endangering Tax Collection and Administration (Fa Shi〔2024〕No.4), concealing income to file false tax returns constitutes false tax declaration through fraudulent or concealed means and constitutes the crime of tax evasion. A retailer shall not be held criminally liable if it pays supplementary taxes, surcharges for late payment and fines as required by tax authorities, and has not been criminally punished for tax evasion nor been given more than two administrative penalties for tax evasion within five years. If the above conditions are not met, the retailer may face criminal liability for the crime of tax evasion.

(II) Prevention of Risks from Off-Book Operations and Concealment of Income

Since the launch of the Golden Tax Phase IV Project, tax risk early warning and inspection case source acquisition no longer rely on traditional methods, but highlight the characteristics of tax governance through data and tax administration through information. Amid the digital upgrading of tax collection and administration, tax authorities may deduce the actual sales of a merchant by combining data such as the number of employees, transaction data with suppliers and customers, and sales data of peer merchants of the same type, and identify off-book operations by comparing with the merchant’s actual tax declaration status.

For gold and silver jewelry retailers, it is imperative to strengthen tax compliance and eliminate off-book operations. Sales income for which no invoices are issued shall be declared as un-invoiced income in accordance with the law. Retailers shall also conduct a retrospective review of prior-year tax declarations, and take the initiative to pay supplementary taxes if any tax evasion or underpayment is found.

II. Tax Risks and Prevention of Establishing Purchase and Sales Links in Xizang

(I) Tax Risks of Establishing Purchase and Sales Links in Xizang

In one of the publicly disclosed cases, a jewelry company had its actual operation address in Province L but established a company in Xizang. It first wholesaled gold and silver jewelry to the Xizang-based company, which then conducted retail sales. Investigation revealed that the enterprise mainly retailed gold through live streaming, with both live streaming and delivery locations in Province L. Furthermore, the Xizang-based company had no actual business premises or personnel, and all accounting, tax declaration and invoice issuance were completed in Province L. The above facts prove that the Xizang-based company was a shell company with no actual operations, established solely to take advantage of Xizang’s policy of temporarily not levying consumption tax on gold and silver jewelry.

Pursuant to Article 63 of the Tax Collection and Administration Law, filing false tax returns to avoid or underpay taxes constitutes tax evasion. In the above case, the actual retail business was carried out by the jewelry company in Province L; the Xizang-based company was merely registered to exploit local policies, and income attributable to the jewelry company was in effect transferred to the Xizang-based company through fictitious purchase and sales transactions, constituting tax evasion via false tax declaration. Tax authorities may recover underpaid consumption tax from the jewelry company, impose surcharges for late payment, and levy a fine of 0.5 to 5 times the underpaid tax amount.

Pursuant to Article 201 of the Criminal Law and Fa Shi〔2024〕No.4, adopting other fraudulent or concealed means to file false tax returns for the purpose of avoiding or underpaying taxes constitutes the crime of tax evasion. Therefore, the above conduct may also be characterized as the crime of tax evasion, and the offender may face criminal liability if the prerequisites for exemption from criminal liability are not satisfied.

(II) Prevention of Risks from Establishing Purchase and Sales Links in Xizang

First, it is necessary to understand changes in Xizang’s consumption tax policies. China’s consumption tax was introduced in 1994. Considering that Xizang’s economic development lagged far behind other inland provinces and cities at that time, the People’s Government of Xizang Autonomous Region issued the Notice of the People’s Government of Xizang Autonomous Region on Forwarding the Implementation Plan for the Industrial and Commercial Tax System Reform of the Xizang Taxation Bureau (Xizang Government Fa〔1994〕No.22), deciding to temporarily exempt consumption tax on taxable products manufactured by production enterprises, except for consumption tax collected by customs on behalf of the state.

With economic and social development, Xizang’s non-full implementation of consumption tax has failed to meet the needs of building a unified national market. In accordance with the Interim Regulations on Consumption Tax and its implementing rules, the People’s Government of Xizang Autonomous Region decided to fully implement consumption tax as of January 1, 2026.

Is the policy of not levying consumption tax in Xizang Autonomous Region lawful in itself? Under the Tax Collection and Administration Law, only laws and administrative regulations may prescribe the introduction of taxes, and no entity may make provisions inconsistent with laws and administrative regulations. The imposition of consumption tax is stipulated by the Interim Regulations on Consumption Tax, an administrative regulation, whose taxable scope covers taxable activities within the territory of the People’s Republic of China without excluding Xizang Autonomous Region. Therefore, Xizang’s non-levy of consumption tax conflicts with the Interim Regulations on Consumption Tax and fails to comply with the principle of statutory taxation.

However, pursuant to Article 20 of the Law on Regional Ethnic Autonomy, if an order of a higher state organ is unsuitable for the actual conditions of an ethnic autonomous area, the autonomous organ may, upon approval by the higher state organ, implement it with modifications or suspend its implementation. As an autonomous organ, the Xizang Autonomous Regional People’s Government may, upon approval by the State Council, implement the Interim Regulations on Consumption Tax (Decree No.135 of the State Council) with modifications or suspend its implementation if it deems the regulations unsuitable for the actual conditions of the ethnic autonomous area.

The explanatory notes to the Draft for Comment of the Notice of the People’s Government of Xizang Autonomous Region on the Full Imposition of Consumption Tax state that "since 1994, in accordance with the spirit of the Third Forum on Work in Xizang and the principle of ‘consistent framework, institutional convergence and appropriate flexibility’, our region has temporarily not levied consumption tax", indicating that Xizang Autonomous Region obtained approval from the State Council before deciding to suspend consumption tax collection and exercised its autonomous power on a legal basis.

Starting from 2026, enterprises in Xizang Autonomous Region shall pay consumption tax in accordance with the law. Pursuant to the principle of non-retroactivity of law, taxable production, wholesale and retail activities of Xizang enterprises before 2026 shall not be retroactively adjusted due to the clear legal basis for non-taxation.

However, Xizang-based enterprises must carefully verify whether they have actual operations in Xizang Autonomous Region. If an enterprise has no actual operation place in Xizang but only establishes a shell company to exploit the local non-levy consumption tax policy, its conduct may constitute fictitious purchase and sales transactions and false tax declaration, exposing it to the aforementioned legal risks of being held liable for tax evasion and the crime of tax evasion. If a retailer has actual business premises and products in Xizang Autonomous Region but sells to consumers nationwide through internet platforms, it shall not be subject to consumption tax obligations pursuant to Xizang Government Fa〔1994〕No.22, which exempts "taxable products" from tax.

III. Tax Risks and Prevention of Falsely Issuing Surplus Invoices

(I) Tax Risks of Falsely Issuing Surplus Invoices

Many jewelry stores sell gold jewelry to individuals without issuing invoices or declaring un-invoiced income. Meanwhile, having obtained sufficient input invoices for purchases, they accumulate surplus invoices. To avoid tax early warnings and seek illegal profits, some stores falsely issue invoices to unrelated third-party companies in exchange for invoicing fees, a practice known as surplus invoice fraud.

Surplus invoice fraud is particularly rampant in industries where downstream customers are mainly individual consumers, such as gold and silver jewelry retail, gas stations and internet enterprises, as consumers often do not request invoices, creating room for surplus invoices.

In the past, surplus invoice fraud was relatively simple: enterprises accumulated input invoices after goods sales and then issued invoices externally, featuring a typical separation of invoices and goods and obvious capital repatriation in the false issuance process. In recent years, such fraud has become more sophisticated, integrating goods sales and invoice issuance into a single chain: consumers pay funds to the invoice recipient, which pays the invoicing party after adding a tax point, and goods are delivered directly to consumers, artificially inserting the invoice recipient into the transaction chain to avoid capital repatriation.

For example, some jewelry stores instruct consumers to place orders in the name of third-party companies, issue invoices to such companies, and deliver goods to actual consumers. Under this model, all objective evidence points to consistency of funds, invoices and goods; the only unreasonable doubt is that the invoice recipient’s business is usually unrelated to the goods involved and has not actually received the goods. There has long been controversy over whether such conduct constitutes a reasonable commercial arrangement or false invoicing.

Reference Case No.1676 of the Criminal Trial Reference issued by the Supreme People’s Court is a typical example, involving a sugar company whose invoices were repeatedly obtained by downstream enterprises. In 2016, a downstream enterprise that obtained invoices from the company was acquitted mainly because all objective evidence indicated that the invoice recipient had actually participated in the transaction chain.

Fa Shi〔2024〕No.4 has resolved this factual dispute through legal provisions by adding a clause stipulating that "falsely issuing special VAT invoices through fictitious transaction subjects for businesses not legally eligible for tax deduction" constitutes false invoicing. Taking gold and silver jewelry retail as an example, consumer purchases of gold and silver jewelry are businesses ineligible for tax deduction. In such transactions, instructing consumers to purchase goods in the name of a fictitious transaction subject and enabling the company to obtain special invoices may be directly characterized as false invoicing through "fictitious transaction subjects".

For retailers, such conduct may constitute false invoicing, exposing them not only to administrative liability in the form of fines under the Invoice Management Measures, but also to criminal risks under Article 205 of the Criminal Law for the crime of falsely issuing invoices.

(II) Prevention of Risks from Falsely Issuing Surplus Invoices

Whether a retailer constitutes the crime of false invoicing depends, on the one hand, on its knowledge of the downstream transaction structure. If a retailer has no knowledge of the downstream structure and the transaction model is directly established by the invoice recipient contacting consumers, the retailer is a victim of malicious invoice exploitation by downstream parties and shall not constitute a crime due to the absence of criminal intent.

On the other hand, if a retailer instructs consumers to place orders in the name of an invoice-receiving company, it has intent to create a fictitious transaction subject and commits false invoicing. However, whether such conduct constitutes the crime of false invoicing remains subject to the exculpatory provision under Paragraph 2 of Article 10 of Fa Shi〔2024〕No.4.

Although Reference Case No.1676 of the Criminal Trial Reference ultimately convicted the defendant of the crime of falsely issuing special VAT invoices, the conviction was not based on the fictitious transaction subject model itself, but on the fact that the fictitious Shanghai-based transaction subject continued to falsely issue special VAT invoices externally after obtaining them, with the purpose of defrauding tax deductions. False invoicing through fictitious transaction subjects shall not be uniformly deemed the crime of false invoicing; consideration shall still be given to the purpose for which the fictitious transaction subject obtained the falsely issued special VAT invoices.

If the fictitious transaction subject obtained the falsely issued special VAT invoices for tax evasion or other non-tax-deduction purposes, without intent to defraud tax deductions and no tax losses caused by deduction, it shall not be convicted of the crime of falsely issuing special VAT invoices.