China’s VAT regulations, in place for 31 years, will be replaced by a new VAT Law on January 1, 2026, marking a significant shift in the country’s tax system. On December 25, 2024, China’s legislature passed the Value-Added Tax Law, replacing the Interim VAT Regulations. The State Council is expected to issue Implementing Regulations to provide further guidance.
China's VAT Law: Main Changes & Implications for Tax Professionals
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Author: Ivana Picajkić
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Fiscal subject related
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Content accuracy validation date:
04.02.2025
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The new VAT law aims to improve tax efficiency, promote economic growth, and ensure fair tax collection while protecting taxpayer rights. It applies to all entities and individuals selling goods, services, intangible assets, real estate, or importing goods in China, with exceptions such as wages, government fees, compensation for expropriations, and deposit interest. As an extra-price tax, VAT must be itemized separately on invoices.
Generally, taxpayers can offset input tax against their VAT liability. Small-scale taxpayers, those with annual VAT sales under 5 million yuan (approximately USD 6.97 million), follow simplified tax calculations unless they choose the general taxation method.
Six main changes in the VAT Law are as following:
- Standardizing Taxable Transactions – VAT now applies to four main categories: goods, services, intangible assets, and real estate, eliminating “labor services” to reduce confusion,
- Simplifying Deemed Sales Rules – Free services are no longer deemed taxable, addressing enforcement and taxpayer burden issues,
- Adjusting Input Tax Deductions – Loan services are no longer listed as non-deductible, easing the VAT burden for inter-enterprise loans,
- Unifying Simplified Tax Rate – The law fixes the simplified tax rate at 3%, but the future of the 5% tax rate remains uncertain,
- Expanding Tax Authority’s Adjustment Powers – Authorities can adjust taxable sales values if deemed significantly too high or low to prevent tax avoidance,
- Legalizing Input Tax Refunds – Taxpayers can carry forward excess input VAT or apply for refunds, formalizing prior reforms.
The VAT system applies different tax rates based on transaction type:
- 13% for goods sales, tangible property leasing, and imports (default rate),
- 9% for services such as transportation, basic telecommunications, real estate, and select goods like agricultural products and utilities,
- 6% for general services and intangible assets not specifically categorized,
- 0% for exports and designated cross-border services.
For simplified taxation, a 3% collection rate is used. Taxpayers handling multiple transactions with different rates must keep separate records; otherwise, the highest rate will apply.
To support key industries and activities, the VAT law grants exemptions for:
- Sales of self-produced agricultural products by producers,
- Medical services provided by healthcare institutions,
- Sales of used goods by individuals,
- Imports of certain scientific equipment and public welfare items,
- Services related to education, marriage, funerals, and cultural or religious activities.
Small-scale taxpayers below a set revenue threshold are fully exempt from VAT. The State Council has the authority to introduce or modify tax incentives for national priorities like small businesses, innovation, and public welfare contributions. Taxpayers who decline these incentives may be restricted from reapplying for up to 36 months.
There are five main issues to watch for when implementing the new regulation:
- Defining “Primary Business” in mixed sales transactions,
- Scope of Zero-Rated VAT for cross-border services,
- Clarifications on Deductible Input VAT and deduction certificate requirements,
- Standardization of VAT Refund Processes across regions,
- Details of Special VAT Preferential Policies for small businesses and key industries.
With the new VAT Law taking effect in less than a year, businesses should monitor upcoming regulations and prepare accordingly.
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