China Passes Its First Value Added Tax Law

On December 25, 2024, the Standing Committee of the 14 National People’s Congress (NPC) approved the Value-Added Tax (VAT) Law, which will come into effect on January 1, 2026.

| Background

Value-added tax (VAT) is the largest tax in China. As a turnover tax and additional tax, VAT taxes the value-added amount of goods, services, intangible assets, and real estate in the process of turnover, and adopts the collection mechanism of “upward levy and downward credit” (in Chinese “上征下抵”), which effectively avoid double taxation while safeguarding tax collection and has good tax-neutral characteristics.

In 2016, the change from a business tax to a value-added tax was fully implemented, and on this basis, the State Council revised the provisional regulations on VAT in 2017. Following the reform deployment of implementing the principle of tax legislation, the State Council drafted the VAT Law, which was adopted by the Standing Committee of the National People’s Congress after three deliberations.

| Major Elements

Firstly, it stipulates the scope of VAT taxation. It specifies that companies and individuals selling goods, services, intangible assets, real estate, and importing goods within the territory of the People’s Republic of China are VAT taxpayers and shall pay VAT in accordance with the provisions of this Law. It also makes provisions on taxable transactions, deemed taxable transactions, and circumstances that do not belong to taxable transactions.

Secondly, the tax rate and taxable amount are clarified. The current tax rates of 13%, 9%, and 6% shall remain unchanged, and zero tax rate shall be applied to the export of some goods and services; the method of VAT calculation shall be stipulated, and the output tax, input tax, and sales shall be defined; and the levy rate of the simplified method of taxation and the method of calculating the taxable amount of imported goods shall be clarified.

Thirdly, it regulates tax incentives. The starting point for small-scale taxpayers has been set; statutory tax exemptions have been enumerated and the State Council has been authorized to stipulate specific standards; and the State Council has been authorized to formulate special preferential policies on value-added tax (VAT) and report them to the Standing Committee of the National People’s Congress (NPC) for the record.

Fourthly, it standardizes the collection management. It specifies that VAT shall be collected by tax authorities and that VAT on imported goods shall be collected by customs and makes provisions on the time of occurrence of VAT obligation, place of payment, taxable period, and withholding agents.

Fifthly, to converge with relevant laws. In connection with the Customs Tariff Law, provisions have been made on the collection and management of value-added tax on imported goods; and in connection with the relevant decisions of the Standing Committee of the National People’s Congress, provisions have been made on the formulation by the State Council of the method of calculating value-added tax on the Chinese-foreign cooperative exploitation of offshore petroleum and natural gas, and so on.

| Next View

As businesses and individuals prepare for the VAT Law’s implementation in 2026, attention will turn to the forthcoming details of the legislation and its implications for taxpayers. Policymakers and tax authorities will focus on ensuring a smooth transition to the new legal framework, preserving the stability of tax policies and compliance processes.

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