Congress approves first consolidated VAT law for January 2026
The first consolidated Value Added Tax Law for China has been approved by the Standing Committee of the National People’s Congress on 25 December 2024. This goes to public consultation and is set to come into effect on 1 January 2026.
The Law represents the consolidation of 30 years or rules and regulations introduced since the 1994 introduction of VAT to China. The new law adheres to the principles of maintaining the current VAT framework and keeping overall tax burdens stable. As such, VAT rates and other key elements remain consistent with the existing system. Below is a detailed summary of the Law, organised by chapters:
Chapter I: General Provisions
The VAT law aims to enhance the tax system to support high-quality economic development, standardize tax collection, and safeguard taxpayer rights. VAT applies to all units and individuals involved in the sale of goods, services, intangible assets, real estate, or the import of goods within China. It excludes specific transactions, such as employee wages, government fees, compensation for expropriations, and interest on deposits. VAT is an extra-price tax and must be itemized separately on transaction documents.
Taxpayers can generally deduct input tax from their payable VAT amount. Small-scale taxpayers, defined as those with annual VAT sales not exceeding 5 million yuan, are subject to simpler calculation methods unless they opt for general taxation.
Chapter II: Tax Rate
The VAT system prescribes differentiated rates:
- 13%: For the sale of goods, tangible property leasing, and imports (default rate).
- 9%: For services like transportation, basic telecommunications, real estate, and specific goods (e.g., agricultural products, utilities).
- 6%: For general services and intangible assets, not otherwise specified.
- 0%: For exports and certain cross-border services as stipulated.
For simplified taxation, a collection rate of 3% applies. Taxpayers engaging in multiple transactions with varying rates must separate their accounts; otherwise, the highest applicable rate prevails.
Chapter III: Taxable Amount
The taxable amount for VAT is determined based on the nature of the transaction:
- General Method: Sales tax minus input tax.
- Simplified Method: Sales multiplied by the levy rate.
- Imports: Taxable price (including customs duty and consumption tax) multiplied by the tax rate.
In cases where sales are unusually low or high without justification, tax authorities may reassess the sales value. Input taxes ineligible for deduction include those related to personal consumption, abnormal losses, or non-taxable transactions.
Taxpayers may carry forward excess input tax to subsequent periods or apply for refunds under specified conditions. Additionally, VAT deductions are disallowed for certain expenditures like resident catering or entertainment services.
Chapter IV: Tax Incentives
To encourage specific sectors and activities, the law provides VAT exemptions:
- Self-produced agricultural products sold by producers.
- Medical services by institutions.
- Sales of used goods by individuals.
- Import of specific scientific equipment and items for public welfare.
- Services for education, marriage, funeral, and cultural or religious activities.
Small-scale taxpayers with sales below a designated threshold are entirely exempt from VAT. The State Council retains authority to introduce or adjust tax incentives for national priorities, such as small enterprises, innovation, and public welfare donations. Taxpayers opting out of incentives face restrictions for up to 36 months.
Chapter V: Collection and Management
VAT obligations arise at specific points depending on the nature of the transaction:
- Upon receipt of sales revenue or issuance of invoices.
- On completion of a taxable transaction.
- For imports, at customs clearance.
VAT payment locations vary based on the taxpayer’s establishment or transaction site. Tax periods range from 10 days to one quarter, with specific deadlines for filing and payment. Special rules govern advance tax payments and handling by withholding agents.
VAT on imported goods is collected by customs, and export-related zero-rate VAT transactions are subject to specific refund/exemption measures. Electronic invoices are emphasized for efficiency, and a collaborative mechanism involving various government departments ensures effective tax administration.
Taxpayers violating the law face penalties under China’s Tax Administration Law. Tax authorities are tasked with creating robust mechanisms for VAT collection and management, supported by interdepartmental cooperation.
Chapter VI: Supplementary Provisions
The law will take effect on January 1, 2026, replacing the existing Interim VAT Regulations. This marks a significant shift in the legislative approach to VAT, aligning it with national economic strategies and providing clarity for taxpayers.
Key Takeaways
- Standardization and Development: The VAT law emphasizes structured implementation aligned with national policies to promote economic growth.
- Comprehensive Coverage: It broadly defines taxable transactions while carving out exemptions for specific goods and services to support public welfare and economic priorities.
- Taxpayer Support: Provisions for input tax deduction and refund options are designed to reduce tax burdens and improve compliance.
- Administrative Clarity: Detailed rules for tax periods, payment locations, and electronic invoicing aim to streamline tax collection and management.
- Future-Proofing: The State Council is empowered to adapt tax incentives and standards as economic and social needs evolve.
This new VAT framework balances the need for effective tax collection with incentives for targeted growth areas, ensuring that the system is both robust and flexible.
