Editor’s Note: Recently, the Shanghai No. 2 Intermediate People’s Court rendered the second-instance criminal judgment No. (2025) Hu 02 Xing Zhong 752, changing the conviction at first instance from the offense of falsely issuing special VAT invoices to the offense of falsely issuing invoices. This case is a typical example in the refined-oil trading sector where false issuance was used to evade consumption tax supervision. On the basis of unchanged fact-finding, the appellate court corrected the application of law. The judgment not only aligns with the narrowing of the criminal scope of the offense of falsely issuing special VAT invoices under the tax-related judicial interpretation issued by the Supreme People’s Court and the Supreme People’s Procuratorate, but also reaffirms an important adjudicative rule: the object of the offense of falsely issuing invoices may include special VAT invoices. Taking this case as an entry point, this article analyzes the legal logic behind the appellate recharacterization and discusses the determination of charges and defense strategies in refined-oil false-issuance cases, with a view to providing practical reference for similar cases.

01 Case Introduction

Li was the actual operator of Company A. Beginning in June 2019, while operating Company A, Li caused Company B to falsely issue special VAT invoices for refined oil products to Company A, despite the absence of real transactions between Company A and Company B. The methods included paying invoice-issuance fees, arranging circular fund flows, and fabricating contracts. The invoices involved tax of more than RMB 18 million, all of which had been authenticated and deducted. In addition, in January 2020, despite the absence of real transactions, Li caused two other companies to falsely issue special refined-oil VAT invoices to Company A, involving tax of more than RMB 7.2 million. These invoices were not deducted. Later, because they could not be used for input VAT deduction, the counterparties reversed part of the invoices by issuing red-letter invoices.

At first instance, the Shanghai Baoshan District People’s Court found that Li had committed the offense of falsely issuing special VAT invoices and sentenced Li to eleven years’ imprisonment. Li appealed. Li argued that his conduct should constitute the offense of illegal purchase and that the original sentence was too heavy. Defense counsel argued that Li obtained the input invoices for the purpose of evading the consumption tax payable on sales of refined oil products; the conduct therefore amounted to evasion of tax within the scope of his own tax obligations and constituted the offense of tax evasion. The Second Branch of the Shanghai Municipal People’s Procuratorate, however, took the position that Li subjectively intended to defraud tax and objectively used the falsely issued special invoices for deduction, causing losses to state tax revenue, and recommended dismissal of the appeal and affirmance of the original judgment. After trial, the Shanghai No. 2 Intermediate People’s Court held that the original judgment had clear fact-finding, sufficient and reliable evidence, and lawful trial procedures, but had improperly applied the law. It therefore corrected the judgment, ultimately finding Li guilty of the offense of falsely issuing invoices and reducing the sentence to six years’ imprisonment.

02 The True Purpose of False Issuance of Special VAT Invoices Under the Refined-Oil Invoice Module Supervision System

The central dispute in this case is whether Li’s conduct of causing others to falsely issue special refined-oil VAT invoices for him constituted the offense of falsely issuing special VAT invoices or another offense. To answer this question, it is first necessary to understand the industry background of refined-oil trading and the supervisory mechanism of the refined-oil invoice module.

Since March 2018, the State Taxation Administration has required refined-oil distribution enterprises to issue refined-oil invoices through the refined-oil invoice module in the VAT invoice management system. The core function of this module is to establish a quantitative cross-checking relationship among purchases, inventory, and sales. When an enterprise purchases refined oil products, it must obtain compliant special VAT invoices for refined oil products, and the system automatically increases the enterprise’s refined-oil inventory data accordingly. When the enterprise issues invoices for external sales of refined oil products, the system automatically deducts the corresponding inventory data. If the enterprise has insufficient inventory data, the system will not allow it to issue refined-oil sales invoices. This supervisory mechanism was designed to prevent the loss of consumption tax at the invoice stage. Consumption tax is levied at the production stage. If traders can purchase refined oil products outside compliant channels, namely by purchasing oil products without invoices, this may mean that consumption tax was not paid at the upstream production stage. Through the rules of “no invoice, no inventory entry” and “no inventory, no invoice issuance,” the refined-oil module compels trading enterprises to purchase invoiced oil products through regular channels, thereby indirectly supervising consumption tax in the circulation stage.

Once the operating logic of the refined-oil invoice module is understood, the purpose of Li’s false issuance of special VAT invoices becomes clear. In the course of refined-oil trading, Li purchased a batch of refined oil products, but the supplier failed to provide special VAT invoices for refined oil products. Because compliant input invoices were absent, Li’s company had no corresponding inventory data in the refined-oil module, which meant that it could not issue special VAT invoices for refined oil products through the system when selling the products externally. To break through this restriction, Li chose to have others falsely issue special refined-oil VAT invoices for his company. The purpose was to increase his company’s inventory data in the refined-oil module, so that the company could properly issue special refined-oil invoices for external sales and consume the module inventory. It can therefore be seen that Li’s purpose in accepting falsely issued invoices was not to fraudulently deduct VAT, but to break through the inventory restrictions of the refined-oil module so that sales invoicing could be completed in the system. In substance, the conduct was an evasion of the supervisory rules governing consumption tax on refined oil products, rather than the use of the deduction function of special VAT invoices to defraud the state of VAT revenue.

03 The Legal Logic Behind the Appellate Court’s Recharacterization as the Offense of Falsely Issuing Invoices

It was precisely on the basis of this judgment that the appellate court held that Li’s conduct did not constitute the offense of falsely issuing special VAT invoices. The next question is: if the conduct does not constitute that offense, under what charge should criminal liability be imposed?

(1) Reasons Why the Conduct Did Not Constitute the Offense of Falsely Issuing Special VAT Invoices

The legislative purpose of the offense of falsely issuing special VAT invoices is to punish conduct that uses the tax-deduction function of special VAT invoices to defraud the state of VAT revenue. Article 10, paragraph 2 of the tax-related judicial interpretation issued by the Supreme People’s Court and the Supreme People’s Procuratorate provides: “Where the purpose is not to defraud tax through deduction, such as for inflating business performance, financing, or obtaining loans, and no tax loss is caused through deduction, the conduct shall not be treated as this offense; where another offense is constituted, criminal liability shall be pursued according to that other offense.” Although this provision lists circumstances such as inflating business performance, financing, and obtaining loans, the word “such as” indicates that the list is not exhaustive. The key lies in two substantive conditions: the conduct must not be aimed at defrauding tax through deduction, and it must not have caused tax losses through deduction.

From the perspective of subjective purpose, Li obtained the falsely issued special invoices to increase inventory data in the refined-oil module and thereby enable external invoicing, not to defraud the state of VAT revenue through false input VAT deductions. Li’s company actually engaged in refined-oil trading and had real purchase and sales activities. The purpose of obtaining falsely issued invoices was to make up for the module inventory gap caused by the upstream supplier’s failure to issue invoices. This purpose is obviously different from the traditional model of shell companies engaging in large-scale false issuance to defraud tax. From the perspective of objective consequences, in the VAT chain of refined-oil trading, enterprises at each stage declared and paid VAT according to the tax amounts recorded on the invoices, and the VAT deduction chain was not broken by the false issuance. VAT is an extra-price tax and a chain tax. As long as each transaction stage truthfully declares and pays tax, the taxpayer’s deduction of input VAT will not cause VAT revenue to be defrauded and lost. Therefore, Li’s conduct satisfied the decriminalization conditions under Article 10, paragraph 2 of the tax-related judicial interpretation issued by the Supreme People’s Court and the Supreme People’s Procuratorate, and should not be treated as the offense of falsely issuing special VAT invoices.

(2) The Object of the Offense of Falsely Issuing Invoices May Include Special VAT Invoices

In this case, the appellate court characterized Li’s conduct as the offense of falsely issuing invoices. The legal basis was Article 205-1 of the Criminal Law, which provides: “Whoever falsely issues invoices other than those provided for in Article 205 of this Law, where the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than two years, criminal detention, or public surveillance, and shall also be fined; where the circumstances are especially serious, the offender shall be sentenced to fixed-term imprisonment of not less than two years but not more than seven years and shall also be fined.” Around this provision, there has been controversy in practice over whether the criminal object of the offense of falsely issuing invoices includes special VAT invoices. One view holds that “invoices other than those provided for in Article 205 of this Law” means invoices other than special VAT invoices, and that the offense of falsely issuing invoices is equivalent to the offense of falsely issuing ordinary invoices; under this view, conduct involving false issuance of special VAT invoices cannot fall within the offense of falsely issuing invoices. This understanding is one of the reasons why many acts of falsely issuing special VAT invoices in earlier judicial practice were uniformly treated as the offense of falsely issuing special VAT invoices.

However, from the perspectives of legislative purpose and systematic interpretation, the above conclusion is difficult to sustain. Specifically, the key to the limiting phrase “other than those provided for in Article 205” lies in the word “provided.” It does not refer to the type of invoice, but to whether the conduct is evaluated as a crime under Article 205. Conduct involving false issuance of special VAT invoices that is “provided for” as a crime under Article 205 of the Criminal Law is excluded from the application of Article 205-1. By contrast, conduct involving false issuance of special VAT invoices that does not constitute the offense of falsely issuing special VAT invoices has not been “provided for” as a crime under Article 205, and may of course be governed by the offense of falsely issuing invoices under Article 205-1. Professor Chen Xingliang pointed out in the article “The Offense of Falsely Issuing Special VAT Invoices: Nature and Definition” that acts of falsely issuing special VAT invoices without the purpose of defrauding state tax revenue are not prescribed as crimes under Article 205 of the Criminal Law and may still fall within the elements of falsely issuing other invoices under Article 205-1. In his view, although such false issuance not aimed at defrauding tax cannot be convicted as the offense of falsely issuing special VAT invoices, it may fully be found to constitute the offense of falsely issuing invoices. Professor Zhang Mingkai took the same position in “On the Structure of the Offense of Falsely Issuing Special VAT Invoices,” stating that even if the actor falsely issued special VAT invoices, as long as the actor did not use the invoices to defraud or deduct tax, the invoices should be regarded as invoices “other than those under Article 205 of this Law.”

In addition, the Supreme People’s Court has expressly endorsed this adjudicative path in the 2025 nationally unified judicial training textbook Criminal Trial Practice. The textbook states that where false issuance of special VAT invoices not aimed at defrauding tax through deduction constitutes a crime, the conviction and punishment may be based on the offense of falsely issuing invoices. This means that, although theoretical controversy remains, the Supreme People’s Court has provided clear adjudicative guidance for judges nationwide through an authoritative textbook. In practice, a number of judicial decisions have already implemented this adjudicative rule.

04 Defense Paths and Strategic Choices in Refined-Oil False-Issuance Cases

For conduct involving falsely issued special refined-oil VAT invoices for the purpose of evading consumption tax supervision, rather than fraudulently deducting VAT, there is real room to substantially reduce punishment through accurate application of law. In light of this case and the adjudicative experience in similar cases, defense in such cases may proceed from the following levels.

First, restore the substance of the transaction. A single act of false issuance should be placed back into the complete refined-oil purchase-and-sale chain for examination, so as to prove that the party had real refined-oil business operations and that the false invoices were used to solve the problem of insufficient inventory data in the refined-oil module, rather than to fabricate tax fraud out of nothing. At the same time, emphasis should be placed on ascertaining and proving the VAT declarations and payments at each stage, in order to demonstrate that the VAT chain was not broken by the false issuance and that no VAT revenue was defrauded and lost.

Second, identify the subjective purpose. The subjective state should be inferred from objective conduct, demonstrating that the party’s subjective purpose in obtaining falsely issued invoices was to break through the inventory restrictions of the refined-oil module and complete external sales invoicing. In essence, the conduct was an evasion of the supervisory rules for consumption tax, rather than a scheme to defraud the state of VAT revenue. This line of argument requires a comprehensive analysis of evidence, including the operating mechanism of the refined-oil module and the party’s business model.

Third, choose the appropriate lesser charge for defense. After excluding the offense of falsely issuing special VAT invoices, defense counsel must select the lighter charge to be advanced based on the circumstances of the individual case. As to the offense of falsely issuing invoices, counsel should argue that the false issuance was not aimed at tax fraud and did not cause VAT revenue to be defrauded and lost, and that the precise calculation of the amount and ratio of tax evasion is not involved. Judging from the actual outcome of this case, it was precisely through this path that Li’s sentence was reduced from eleven years to six years. As to the offense of tax evasion, defense counsel should also give it serious consideration. The Supreme People’s Court has made clear in Criminal Trial Practice that false issuance of special VAT invoices for the purpose of tax evasion does not constitute the offense of falsely issuing special VAT invoices, and it identifies invoice transformation in the refined-oil industry to evade consumption tax as a typical applicable scenario. At the same time, the offense of tax evasion is subject to the penalty-blocking provision in Article 201, paragraph 4 of the Criminal Law: where, after the tax authority pursues collection, the taxpayer pays the tax and late payment surcharge and accepts administrative punishment, criminal liability shall not be pursued. The Supreme People’s Court further states in Criminal Trial Practice that for tax evasion cases that directly enter the criminal justice process without prior handling by the tax authority, if the conditions are satisfied, the people’s court should lawfully terminate the trial after the case enters the trial stage. Therefore, if the conditions for applying the offense of tax evasion are present, the party may avoid criminal liability. Defense counsel should comprehensively assess the evidence, the stage of proceedings, and the expected punishment in the individual case, and formulate the optimal strategy for the client.

Conclusion: Starting from the principles of consistency between subjective intent and objective conduct, and proportionality between culpability, responsibility, and punishment, this case held that conduct involving falsely issued special refined-oil VAT invoices for the purpose of evading consumption tax supervision did not constitute the offense of falsely issuing special VAT invoices, but should instead be punished as the offense of falsely issuing invoices. This adjudicative path is consistent with the spirit of the tax-related judicial interpretation issued by the Supreme People’s Court and the Supreme People’s Procuratorate in narrowing the criminal scope of the offense of falsely issuing special VAT invoices, and also echoes the adjudicative rule established in the Supreme People’s Court’s judicial training textbook. For enterprises and individuals facing similar tax-related disputes or criminal cases, it is advisable to seek professional legal support as early as possible, and to formulate targeted defense strategies from the perspectives of conduct characterization, evidence review, and tax principles, so as to seize the best timing for defense. In addition, this judgment may also serve as a reference for petitions for retrial or complaint in similar cases where convictions were previously entered for the offense of falsely issuing special VAT invoices. Parties who meet the conditions may, after professional assessment based on the specific circumstances of the case, seek relief through lawful petition channels.