On December 25, 2024, the Standing Committee of the 14th National People’s Congress (NPC) voted to pass the Value-Added Tax Law of the People’s Republic of China (the VAT Law) on its 13th meeting. The VAT Law will come into effect on January 1, 2026.
The current regulation that governs VAT matters is the Interim Regulation of the People's Republic of China on Value Added Tax (2017 Revision), which is an administrative regulation in nature originally issued by the State Council in 1993 and then amended respectively in 2008, 2016, and 2017; and it will become invalid when the VAT Law herein comes into effect on January 1, 2026.
The VAT Law herein, as a law issued by the National People’s Congress, is superior to the said administrative regulation issued by the State Council. Therefore, it is an important step to implement the principle of tax legislation, and it is beneficial to promote the rule of the state in accordance with the law in a comprehensive manner and lay an important taxation legal foundation for the modernization of the national governance system and governance capacity. It is reported that VAT is the number one tax in China. In 2023, the domestic VAT revenue amounted to 6.93 trillion yuan, the import VAT revenue amounted to 1.84 trillion yuan, and the export tax refunds amounted to 1.71 trillion yuan; the total VAT revenue of the year was 7.06 trillion yuan, which accounted for about 39% of all tax revenue.
The VAT Law contains 38 articles in six chapters. In the Chapter One “General Principles”, it provides that “Work units and individuals (including individual industrial and commercial households) that sell goods, services, intangible assets and immovable property (hereinafter referred to as taxable transactions) within the territory of the People's Republic of China (hereinafter referred to as the territory), as well as those that import goods, are value-added tax (VAT) payers, and shall pay VAT in accordance with the provisions of this Law. The sales of goods, services, intangible assets and immovable property refers to the transfer of ownership of goods and immovable property for a fee, the provision of services for a fee, and the transfer of ownership or the right to use intangible assets for a fee.” It also defines the taxable transactions within the territory as following circumstances: “1) In case of selling goods, the place of origin or location of the goods is within the territory; 2) In case of selling or leasing real estate or transferring the right to use natural resources, the place where the real estate or natural resources are located is within the territory; 3) In case of selling financial commodities, the financial commodities are issued within the territory, or the seller is a unit or individual within the territory; 4) In addition to the provisions of the second and third subparagraphs herein, in case of selling services or intangible assets, the services or intangible assets are consumed within the territory, or the seller is a work unit or individual within the territory.”
Chapter Two “Tax Rate” exemplifies the VAT rate levied on various goods or services. For instance, “The tax rate for a taxpayer's sale of goods, processing, repair and repair services, tangible movable property leasing services, and importing goods, except as provided for in the second, fourth and fifth subparagraphs of this Article, shall be thirteen percent (13%).” “The tax rate for a taxpayer’s selling transportation, postal services, basic telecommunications, construction, real estate leasing services, selling real estate, transferring land use rights, selling or importing the following goods, except as provided for in the fourth and fifth subparagraphs of this Article, the tax rate shall be nine percent: 1) agricultural products, edible vegetable oil, edible salt; 2) tap water, heating, cooling, hot water, coal gas, liquefied petroleum gas, natural gas, dimethyl ether, biogas, coal products for residential use; 3) books, newspapers, magazines, audio-visual products, electronic publications; 4) feed, fertilizers, pesticides, agricultural machinery, agricultural film.”
In terms of “Tax Payable” (Chapter Three), it mainly provides that the tax payable calculated in accordance with the general tax method is the balance of the current output tax offset by the current input tax; the tax payable calculated in accordance with the simple tax method is the current sales multiplied by the levy rate. In the case of imported goods, the VAT payable is calculated in accordance with the constituent taxable price multiplied by the applicable tax rate. The portion of the current input tax that is greater than the current output tax can be carried forward to the next period for further deduction or refund.
It is worth noting that the following items are exempt from the VAT provided in Chapter Four “Tax Incentives”: “1) Self-produced agricultural products sold by agricultural producers, agricultural mechanization, drainage and irrigation, pest control, plant protection, agricultural and livestock insurance, and related technical training business, breeding and disease control of poultry, livestock, and aquatic animals; 2) Medical services provided by medical institutions; 3) Antique and old books, and items sold by natural persons for their own use; 4) Imported instruments and equipment directly used for scientific research, scientific experiments and teaching; 5) Imported materials and equipment provided by foreign governments and international organizations for free assistance; 6) Goods imported directly for the exclusive use of disabled persons by their organizations, and services provided by disabled persons personally; 7) Care services provided by nurseries, kindergartens, elderly care institutions, and service organizations for the disabled, marriage introduction services, and funeral services; 8) Academic education services provided by schools, and services provided by students working part-time while studying; 9) Admission fee income from cultural activities organized by memorial halls, museums, cultural halls, management institutions of cultural relics protection units, art galleries, exhibition halls, painting and calligraphy institutes, and libraries, and admission fee income from cultural and religious activities organized by places of worship.”
In Chapter Five “Collection Management”, it provides that VAT is collected by the tax authorities, and VAT on imported goods is collected by the Customs. It also provides other matters including, but not limited to, the time of occurrence of VAT obligation, place of tax payment, tax calculation period, withholding agent, tax-related information sharing, and so on.