As a core industrial pillar underpinning the development of agriculture, rural areas and farmers (the "Three Rural Issues"), the agricultural product sector is deeply embedded in rural revitalization and the modernization of agricultural and rural development, occupying a strategically pivotal position in China’s overall national development agenda. Nevertheless, the unique provisions governing agricultural product taxation have rendered the industry prone to tax recovery orders, late payment surcharges, findings of tax evasion and export tax fraud, consistently landing it under intensive scrutiny from tax audit authorities. Drawing on typical publicly disclosed tax cases in the agricultural product sector released this year, this article pinpoints prominent industry-wide tax compliance pitfalls and puts forward practical compliance suggestions for market participants operating in the sector.

I. Case 1: Listed Subsidiary Ordered to Pay RMB 472 Million in Recovered Taxes and Late Surcharges over Disputed Input Tax Deduction for Tax-exempt Rapeseed Meal

On April 18, 2026, a listed company disclosed a tax dispute involving its subsidiary in its 2025 annual report. On November 17, 2023, the subsidiary received a Tax Treatment Decision issued by the competent tax authority. The tax authority ruled that the entity had inaccurately calculated non-deductible input VAT attributable to its tax-exempt rapeseed meal sales for the period from July 1, 2012 to June 30, 2022. Such miscalculation led to understatement of non-deductible input VAT and excessive refund of incremental VAT excess input tax credits. The subsidiary was ordered to reverse RMB 393 million in undercalculated non-deductible input VAT for the aforementioned period, and pay supplementary VAT, urban maintenance and construction tax, education surcharge, local education surcharge plus accrued late payment penalties totaling RMB 121 million based on the revised tax computation.

Dissatisfied with the ruling, the subsidiary filed an administrative reconsideration application. On April 17, 2024, the reconsideration authority upheld the original tax authority’s administrative ruling. On April 28, 2024, the subsidiary initiated administrative litigation, petitioning the court to revoke both the Tax Treatment Decision and the Administrative Reconsideration Decision, and compel the competent tax bureau to refund the RMB 121 million in taxes and late penalties already remitted. On June 24, 2025, the subsidiary received the first-instance judgment dismissing all its litigation claims, and filed an appeal on July 8, 2025. As of the approval date of its 2025 financial statements, the appellate proceedings remain pending.

A growing number of enterprises have faced tax recovery and late penalty assessments in recent years stemming from divergent interpretations of preferential tax rules for agricultural products, with this case a typical example rooted in differing regulatory understandings. Per the Notice of the Ministry of Finance and State Taxation Administration on VAT Exemption for Feed Products (Cai Shui〔2001〕No.121), rapeseed meal, cottonseed meal, sunflower seed meal, peanut meal and other oilseed meals (excluding soybean meal) qualify for VAT exemption, meaning no output VAT is levied on their sales. Under prevailing VAT legislation, input VAT incurred to produce tax-exempt goods is non-deductible against taxable output VAT.

Where a general VAT taxpayer procures inputs used concurrently for both taxable and tax-exempt production and cannot segregate relevant deductible input VAT by purpose, non-deductible input VAT shall be computed per the statutory formula:

Non-deductible Input VAT = Total Unallocated Monthly Input VAT × Monthly Tax-exempt Sales Revenue ÷ Total Monthly Sales Revenue

Given the subsidiary’s core business of feed protein manufacturing, its raw material inputs generate both tax-exempt rapeseed meal and taxable finished goods, necessitating pro-rata apportionment of input VAT between the two product lines via the above formula whenever input costs cannot be directly allocated. Three interpretative ambiguities surrounding the apportionment formula triggered the core dispute:

Whether "total sales revenue" under the formula refers to VAT-inclusive or VAT-exclusive consideration;

If total sales are VAT-exclusive, whether tax-exempt sales proceeds require conversion to a VAT-exclusive basis;

Whether revenue derived from sales unrelated to the procured inputs shall be included in the total sales denominator when apportioning unallocated input VAT.

As to the first question, both the former Provisional Regulations on Value-Added Tax and the draft Value-Added Tax Law of the People’s Republic of China explicitly define sales revenue as all consideration and additional charges received from taxable transactions, excluding collected output VAT, confirming statutory sales revenue is always VAT-exclusive.

For the second question, two official SAT circulars set clear guidance. SAT Reply on Determination of Tax-exempt Goods Revenue for Input Tax Apportionment Purposes (Guo Shui Han〔1997〕No.529) stipulates tax-exempt sales and non-taxable business income shall not be converted into VAT-exclusive figures for apportionment calculations. A subsequent ruling (SAT Reply on Tax Issues Concerning Dexing Copper Mine, Jiangxi Province, Guo Shui Han〔1998〕No.391) further clarifies tax-exempt goods revenue is inherently VAT-inclusive given zero output VAT is charged on exempt sales, and such gross proceeds shall be used directly when calculating the apportionment ratio.

On the third issue, the statutory formula contains no textual carve-out for excluding specific sales items from total turnover, which prima facie mandates full inclusion of all operating revenue. While statutory provisions appear unambiguous, inconsistent practical implementation persists across tax jurisdictions. In the instant case, the subsidiary presumably converted its tax-exempt rapeseed meal revenue to VAT-exclusive amounts before plugging into the formula’s numerator, artificially lowering the proportion of non-deductible input VAT and resulting in underpaid VAT plus wrongful excess input tax credit refunds.

II. Case 2: Timber Manufacturer Found Liable for Tax Evasion by Abusing Approved Deduction Rules for Agricultural Input VAT

On January 30, 2026, Huzhou tax authorities publicly penalized a wood products enterprise for tax evasion perpetrated via falsified special VAT invoices and improper exploitation of the agricultural product approved input VAT deduction regime. Per the Notice of Zhejiang Provincial Department of Finance and Zhejiang Provincial Tax Service on Expanding Pilot Scope for Approved Input VAT Deduction on Agricultural Products (Zhe Cai Shui Zheng〔2017〕No.32), manufacturers producing woodwork and all general VAT taxpayers engaged in wholesale/retail of agricultural products within Zhejiang are enrolled in the approved deduction pilot program. Pilot taxpayers no longer rely on conventional deductible VAT vouchers to claim input VAT on purchased agricultural raw materials; instead, input tax is quantified via methodologies laid out in the Notice on Pilot Approved Input VAT Deduction for Agricultural Products in Selected Industries (Cai Shui〔2012〕No.38). Wood processors in the province adopt the Cost Method for approved input tax calculation as specified in the implementing provisions.

Though relieved from voucher-based input deduction obligations, the timber enterprise was still required to retain legitimate invoices to substantiate production costs and verify actual agricultural raw material consumption ratios used in its approved deduction calculations. Between 2021 and 2023, the defendant wood firm obtained counterfeit special VAT invoices in exchange for illegal invoice commissions, artificially inflating its documented agricultural raw material consumption rate to fraudulently boost deductible deemed input VAT. Such misconduct caused underpayment of VAT, corporate income tax and other statutory levies totaling RMB 3.8368 million. Tax authorities ruled the enterprise committed statutory tax evasion and issued a composite recovery, late surcharge and fine order amounting to RMB 7.4878 million in aggregate.

Recurring agricultural product tax crimes largely stem from bad-faith exploitation of the industry’s unique input deduction framework, which falls into three primary categories:

1.Direct deduction against valid special VAT invoices or customs import VAT payment receipts;

2.Notional deduction calculated at statutory rates based on agricultural sales invoices (issued by qualifying agricultural producers) or self-prepared agricultural purchase invoices (filled out by purchasing enterprises);

3.Approved deemed input deduction under the provincial pilot schemes.

The expanded deduction alternatives exist to preserve intact VAT deductive chains: domestic VAT is waived on self-produced primary agricultural goods sold by farming households and agricultural cooperatives, breaking the normal downstream input credit chain; self-prepared purchase invoices and approved deemed deduction rules were therefore introduced to avoid excessive tax burdens for downstream processors. Chinese tax regulators have also imposed provincial-level restrictions governing purchase invoice issuance and approved deduction coverage to curb speculative abuse. Nevertheless, illicit actors continue manipulating these preferential rules, as seen here where falsified invoices inflated consumption ratios to unlawfully inflate approved deductible input tax.

III. Case 3: Controller Convicted of Export Tax Fraud via Fictitious Tax-exempt Agricultural Product Invoices

On February 27, 2026, Guizhou Provincial Tax Service exposed a major export tax fraud case centered on manipulated agricultural product invoices. Huidafeng Co., Ltd. specialized in manufacturing and exporting concentrated shiitake mushroom extracts overseas, with Xu as its de facto controlling person. Official investigations spanning 2020 to 2022 confirmed rural cooperatives supplying raw shiitake mushrooms issued agricultural invoices far exceeding their actual production volumes and physical inventory levels. Cooperative principals testified they collected illicit invoicing fees from Huidafeng to issue inflated tax-exempt agricultural invoices for the enterprise’s benefit.

Upstream component suppliers processed low-value shiitake mushroom trimmings into concentrated extracts with an actual production cost of RMB 9 per kilogram, yet falsified unit costs up to RMB 90 per kilogram in bookkeeping before billing Huidafeng at RMB 180 per kilogram via special VAT invoices. The defendant subsequently executed sham export contracts with overseas counterparties and fabricated cross-border foreign exchange receipts through underground banking channels to unlawfully claim export VAT refunds. Tax authorities fully recovered RMB 54.6509 million in defrauded export tax refunds and suspended the company’s export refund eligibility for three consecutive years. Principal perpetrator Xu received a 13-year fixed-term custodial sentence plus full confiscation of his personal property upon conviction of export tax fraud.

The entire criminal scheme was predicated on the statutory VAT exemption applicable to rural specialized cooperatives selling primary farm produce cultivated by their registered members, which entitles cooperatives to issue tax-exempt agricultural invoices with no output VAT payable. Downstream processors may calculate deductible input VAT at 9% or 10% statutory deemed deduction rates based on the purchase value listed on such valid agricultural invoices. By overstating transaction values on tax-exempt cooperative invoices, the upstream supply chain artificially inflated downstream input VAT credits to offset excessive output VAT generated from overpriced special VAT invoices issued to Huidafeng, which the defendant then leveraged to submit fraudulent export refund applications and siphon state fiscal funds.

Notably, criminal conviction for coordinated chain-wide export fraud hinges on sufficient, corroborated evidentiary proof of artificially marked-up invoice pricing and fictitious underlying transactions. Judicial findings cannot rely on speculative reverse inference to deem invoices inflated, nor admit coerced suspect statements as conclusive evidence of improper over-invoicing.

IV. Conclusion

Persistent tax disputes across the agricultural product industry frequently originate from inconsistent or erroneous interpretation of specialized agricultural tax legislation. Industry participants should prioritize periodic in-house tax health reviews and comprehensive compliance self-audits covering all applicable preferential tax provisions to map existing contingent tax exposures and rectify non-compliant accounting practices promptly upon discovery.

Given divergent local implementing rules governing self-prepared agricultural purchase invoices and pilot approved input deduction mechanisms across provincial jurisdictions, agricultural enterprises are advised to compile and maintain a centralized internal regulatory database tracking the validity and latest revisions of industry-specific tax policies to eliminate compliance risks arising from misapplied or misinterpreted regulatory clauses. When undergoing formal tax audits, taxpayers shall fully compile underlying supporting documentation including commercial contracts, full invoice trails, bank capital flows and warehouse inbound/outbound inventory logs, actively cooperate with tax investigative work, truthfully articulate the commercial substance of disputed transactions and duly exercise statutory rights of statement and defense to mitigate the risk of supplementary tax assessments, statutory penalties for tax evasion or criminal liability for export tax fraud.