On 31 August 2026, the State Taxation Administration (STA) published a taxpayer Q&A addressing the eligibility for value-added tax (VAT) input tax deduction on inventory destroyed by natural disasters. The query originated from a manufacturing enterprise whose warehouse suffered severe flooding due to heavy rainfall, resulting in total loss of stored goods. The taxpayer sought clarification on whether the input VAT previously claimed on the damaged inventory must be reversed or remains deductible under the VAT Provisional Regulations (State Council Order No. 538) and relevant Implementation Rules (Ministry of Finance and STA Order No. 43). This guidance is critical for enterprises operating in flood-prone regions and those managing large inventory holdings, as it directly impacts VAT compliance, cash flow management, and year-end tax reconciliation.
Key Takeaways
- Input Tax Deduction Eligibility Confirmed for Non-Abnormal Losses: The STA reiterated that input VAT on inventory lost due to natural disasters (e.g., floods, earthquakes) qualifies as “abnormal loss” only if the loss results from poor management, theft, or loss. Since the taxpayer demonstrated proper storage conditions and management, the loss is categorized as force majeure, allowing the input tax to remain deductible without reversal, provided supporting evidence such as disaster reports and inventory write-off approvals are retained. This interpretation aligns with Article 10 of the VAT Provisional Regulations and Article 28 of the Implementation Rules, which limit input tax reversal to losses caused by abnormal reasons.
- Documentation and Evidence Requirements: Enterprises must maintain comprehensive records including meteorological disaster certificates issued by local emergency management authorities, internal inventory loss reports approved by management, and accounting entries reflecting the write-off. The tax authorities may request these documents during audits to verify the legitimacy of the deduction. Additionally, taxpayers should reference STA Announcement No. 36 of 2016 on VAT asset loss deductions to substantiate their filing position.
- Impact on VAT Filing and Cash Flow: The clarification ensures that affected businesses can continue to claim input VAT credits in the current filing period without awaiting a separate approval process, thereby preserving liquidity. However, companies should coordinate with local tax bureaus to confirm any regional reporting requirements or supplementary filings, especially for cross-regional enterprises where inventory is stored in multiple jurisdictions.
Disclaimer: This article is compiled and summarized by the AI based on publicly available information and is for general information purposes only. It does not constitute any form of formal tax advice, legal opinion, or basis for performance. Please consult a qualified professional tax advisor or legal counsel for tax advice.
Source: Read Official Announcement