China’s New Draft VAT Law – How is it Different from Previous Tax Regulations?

Posted by Written by Arendse Huld Reading Time: 12 minutes

China has released an updated draft version of the value-added tax law for public comment. The draft legislation consolidates previous tax regulations into one document while making a few significant changes and adjustments to current tax standards and regulations. We explain the major changes that the draft China value-added tax law would bring to the country’s tax regime and discuss how it may impact businesses.

UPDATE (September 1, 2023): The National People’s Congress (NPC), China’s legislature, has released the second draft of the Value-Added Tax Law. The second draft makes several adjustments to the structure of the law and provides additional clarity on certain definitions and procedures. The NPC is soliciting opinions from the public on the second draft for a period of 30 days (until September 30, 2023).

On December 27, 2022, the National People’s Congress (NPC) announced it had submitted the draft version of the Value Added Tax Law of the People’s Republic of China (the “draft VAT Law”) for deliberation. If passed, the VAT Law will consolidate China’s current VAT regulations into one overarching piece of legislation.

On September 1, 2023, the NPC released the second version of the draft VAT law, making a few small but significant changes. 

The draft VAT law maintains the majority of China’s existing VAT regulations, with a few changes made to clarify definitions, adjust the scope of taxable and non-taxable items, and the addition of a new VAT refund mechanism, among others. 

The NPC will be soliciting public comments on the draft VAT Law until January 28, 2023. A previous version of the draft VAT law was released for public comment in 2019, but the document has so far not been passed into law. 

Below we discuss some of the updates and changes that have been proposed in the draft law, including the latest additions and changes in the second draft released on September 1, 2023, and explain how they differ from previous regulations.

Background: China’s existing VAT system 

China’s current VAT system is based upon a set of temporary regulations and implementation measures. The earliest of the VAT regulations that are currently in place came into effect in 1993.  

The current VAT rules are based on the following rules and regulations: 

The draft VAT law states that, upon entry into force, it will replace the interim VAT regulations mentioned above. 

The draft VAT law also draws upon various other official rules and notices released by the State Tax Administration over the years, including the Implementation Measures for the Pilot Program of Levying Value-Added Tax Instead of Business Tax (“Circular 36”), released in 2016. Circular 36 was released along with several appendices, including the Provisions on Matters Related to the Pilot Program of Replacing Business Tax with Value-Added Tax and the Provisions on the Transitional Policies for the Pilot Program of Replacing Business Tax with Value-Added Tax. 

VAT taxpayers are categorized into two types: general taxpayers and small-scale taxpayers. Small-scale taxpayers are subject to a lower VAT levy rate of 3 percent, as opposed to general taxpayers, who are subject to a progressive VAT rate of 0 to 13 percent, depending on the types of goods and services they provide (a 5 percent VAT rate is levied on the sale of immovable property and real estate rental services). 

Although small-scale taxpayers are subject to lower VAT levy rates and several VAT incentives, they cannot credit input VAT from output VAT, and they are not entitled to VAT refunds for export products, unlike general taxpayers. 

How businesses are categorized mostly depends on their annual taxable sales amount; from 2018 onward, the threshold for small-scale taxpayers has been up to RMB 5 million (approx. US$742,214) in sales. But VAT taxpayers whose annual taxable sales are below the threshold, as well as those who have newly established their business, can voluntarily apply for general taxpayer recognition provided they are capable of setting up legitimate, valid, and accurate bookkeeping. 

What are the differences between the draft VAT law and existing regulations? 

The draft VAT law consolidates the pre-existing rules and regulations on VAT into one document, including the various updates to the rules that have been released in the intervening years. It also provides additional clarifications, such as the definitions of different taxable transactions. 

Below we outline some of the main changes and adjustments in the draft VAT law.

Clarification of “small-scale taxpayers” 

The second draft adds a new article clarifying the definition of a “small-scale taxpayer”. Article 8 of the second draft defines them as “taxpayers whose annual VAT sales do not exceed RMB 5 million (approx. US$680,772)”. This is in line with the definition of small-scale taxpayers in other regulations, but its inclusion in the VAT law will provide additional protection for smaller businesses in affairs related to VAT payments. 

The definition of a small-scale taxpayer is important because these taxpayers are eligible for a lower VAT rate and “simplified tax calculation method” under the VAT law. However, the second draft also allows for small-scale taxpayers to choose to register as general taxpayers and calculate and pay VAT in accordance with the general tax calculation method, if they have sound accounting practices and are able to provide accurate tax information.  

The general tax calculation method involves deducting output tax from input tax to calculate the tax payable. In the simplified tax calculation method, meanwhile, the VAT payable is calculated based simply on the sales volume and applicable VAT rate (3 percent for small-scale taxpayers). 

The VAT sales threshold for a small-scale taxpayer may be adjusted by the State Council, China’s cabinet, based on the current needs of China’s economic and social development. 

Set VAT rates 

The headline VAT rate was lowered to 13 percent from 16 percent in 2019, along with the other VAT tax rates (from 10 to 9 percent for certain goods and services). 

The initial headline VAT rate set in the interim VAT regulations was 17 percent. The draft VAT law has set the headline rate at 13 percent, indicating that this will be the set rate and will not be raised again. 

VAT Rates in the Draft VAT Law

VAT rate  Applicable scope  Scope in previous regulations 
13 percent  Sale of goods, processing and repairing services, leasing services of tangible movable properties, and import goods Sale of goods, labor services, tangible movable leasing services of tangible movable properties, and import goods 
9 percent  Sale of transportation, postal services, basic telecommunications, construction, real estate leasing services, real estate, transfer land use rights, and sale or import of the following goods: 

  1. Agricultural products, edible vegetable oils, edible salt 
  2. Tap water, heating, air-conditioning, hot water, gas, liquefied petroleum gas, natural gas, dimethyl ether, biogas, coal products for residential use
  3. Books, newspapers, magazines, audio-visual products, electronic publications
  4. Animal feed, chemical fertilizer, pesticides, agricultural machinery, agricultural film
6 percent  Sale of services and intangible assets.   
3 percent  Taxpayers eligible for the “simplified tax calculation method” (简易计税方法) Small-scale taxpayers 
0 percent  Export of goods and cross-border sales of services and intangible assets  

Legal definitions of “domestic taxable transactions” 

The draft VAT law clarifies the definition of several tax terms, such as “taxable transactions” and “domestic taxable transactions”. 

Under the draft VAT law, “domestic taxable transactions” include the following scenarios: 

  1. Where the place of departure or location of the goods for sale is within the territory of China; 
  2. Except as otherwise stipulated in [the following two items], for the sale of services and intangible assets, where the services and intangible assets are consumed within China, or the sellers are domestic entities or individuals; 
  3. Where real estate is sold or leased, or the right to use natural resources is transferred, and the real estate or natural resources are located within the territory of China; and 
  4. For the sale of financial products, where the financial products are issued domestically, or the sellers are domestic entities and individuals. 

The above circumstances contain some slight changes in scope from previous regulations. First of all, item two above states, “where the services and intangible assets are consumed within China, or the sellers are domestic entities or individuals”, they are considered domestic taxable transactions. This is different from the 2016 Circular 36, which states that if the “seller or the buyer of the service is within the territory of China”, then it will be considered domestic sales of services, and will be subject to VAT. 

The change indicates that, under the draft VAT law, if the seller is overseas and the buyer is in China, but the service is consumed overseas, then it will not be considered a “domestic taxable transaction”; if both the seller and the buyer are overseas, but the service is consumed in China, then it will be considered a “domestic taxable transaction”.  

This indicates that lawmakers are following the “destination principle” for determining where supplies of internationally traded services should be subject to VAT – that is, taxing supplies in the jurisdiction in which they are consumed. However, this may also imply that VAT will be triggered when the service provider and the service recipient are outside of China but the service is consumed in China. More clarification in the form of implementation guidelines will be required to determine exactly how this will be implemented. 

Secondly, the draft VAT law has added the scope of financial products into the definition of “domestic taxable transactions” (item 4 above),  which has been incorporated from a clause in Circular 36. 

Legal definitions of “deemed sales” 

The draft VAT law has significantly reduced the scope of deemed sales that are still subject to VAT. In the draft VAT laws, the following transactions are considered deemed sales: 

  • The use of self-produced or entrusted processed goods by entities or sole proprietors for collective welfare or personal consumption; 
  • The gifting of goods by entities and sole proprietors; 
  • The gifting of intangible assets, real estate or financial commodities by entities and individuals; and 
  • Other circumstances prescribed by the financial and tax authorities of the State Council. 

Previously, the VAT implementation rules included a total of eight items that were considered deemed sales, including: 

  • The delivery of the goods to other units or individuals for sale; 
  • The sale of consignment goods; 
  • Cross-county or cross-municipal transfer of goods between institutions that have implemented a unified accounting system; 
  • The provision of goods that have been self-produced, commissioned, or purchased as an investment to other entities or sole proprietorships; and  
  • The distribution of goods that have been self-produced, commissioned, or purchased goods to shareholders or investors. 

According to Cai Yanfu, Partner at Zhongrui Tax Accountants Group, with the exception of to the cross-county or cross-municipal transfer of goods, the omission of the above items does not necessarily mean that they are exempt from VAT. Instead, it simply means that these types of transactions are considered to be normal sales, rather than deemed sales, and therefore are still subject to VAT.  

For the cross-boundary transfer of goods, the main difference will be that the attribution of tax sources has changed, as one institution will continue to generate the input and the other will generate the output. For instance, when goods are transferred from Branch A to Branch B, where the two branches are within the same group, Branch A recognizes the sales and output VAT, while Branch B will claim input VAT of the same amount when it sells the goods on to a client. In this scenario, this kind of internal transfer is still treated as a taxable transaction, and the VAT is transferred from Branch A to Branch B. 

Finally, the draft VAT law omits services provided free of charge in the scope of deemed sales, which was previously included in the scope of deemed services in Circular 36. 

This change would be of significant benefit to large conglomerates with subsidiaries that regularly provide free services to one another, which is relatively common. It is nonetheless important to note that the tax authorities still have the right to verify the price of the services for income tax purposes, even if it is not regarded as a sale for VAT purposes. 

Non-taxable transactions 

The draft VAT law explicitly stipulates that the following activities do not constitute “taxable transactions”, and are therefore not subject to VAT: 

  1. The provision of services by an employee in order to obtain wages and salaries from an employer; 
  2. The collection of administrative fees and government funds; 
  3. The collection of compensation for being expropriated or requisitioned in accordance with the law; and 
  4. Obtaining income from deposit interest. 

Items 1, 2, and 4 above are all mentioned in the appendices to Circular 36 and are all classified as tax-exempt items. Item 3 is also previously mentioned in an appendix to Circular 36 but has been reworded for clarity. Previously, the activity whereby “the local people’s government at or above the county level or the natural resources administrative department assigns, transfers or takes back the right to use natural resources” is listed as a tax-exempt item. 

The main change in the draft VAT law is that the above items are now consolidated under non-taxable activity, which confirms their status as tax-exempt items. 

Change in deductibles and non-deductibles 

The draft VAT law makes a few minor changes from previous regulations to how non-deductible tax items are defined.  

First of all, under the list of items that cannot be deducted from the taxpayer’s output tax, “input tax corresponding to catering services, residents’ daily services, and entertainment services purchased and directly used for consumption” is included. The draft VAT law added the phrase “directly used for consumption”, which indicates that if these types of services are made for resale, and not for direct consumption, then they can be creditable. This will positively impact businesses, such as catering platforms, travel agents, and marketing and exhibition companies whose operations are based partly on the purchase of services for resale.  

The draft VAT law also upholds a decision from 2019 to overrule a provision in Circular 36 that stipulated that domestic passenger transport services could not be credited against input VAT. This means that domestic passenger transport services will continue to be tax-deductible items. 

Finally, the draft VAT law also cancels a provision from Circular 36 that states that loan services cannot be credited against input VAT, which would greatly benefit taxpayers. 

Changes to the scope of tax exemption 

The draft VAT law consolidates the tax exemption rules from the interim VAT regulations and Circular 36, while also making a few key changes. 

The first is a change in the scope of tax-exempt items, as well as additional clarifications of the items, as shown in the table below. 

Comparison of VAT-Exempt Items in Interim VAT Regulations and Draft VAT Law
Interim VAT regulations  Draft VAT law
  1. Self-produced agricultural products sold by agricultural producers.
  2. Contraceptive drugs and appliances. 
  3. Antique books. 
  4. Imported equipment and instruments for the direct use in scientific research, scientific experiments, and teaching. 
  5. Imported materials and equipment that have been given for free in aid by foreign governments and international organizations. 
  6. Directly imported articles for the exclusive use of disabled persons by organizations of disabled persons. 
  7. Sales of items that have already been used by oneself. 


  1. Self-produced agricultural products sold by agricultural producers, agricultural mechanical farming, irrigation and drainage, pest control, plant protection, agricultural and animal husbandry insurance, and related technical training business, breeding of poultry, livestock, and aquatic animals, and disease prevention and control.
  2. Contraceptive drugs and appliances, and medical services provided by medical institutions; 
  3. Antique books and articles that have been used and sold by natural persons themselves. 
  4. Imported equipment and instruments for the direct use in scientific research, scientific experiments, and teaching. 
  5. Imported materials and equipment that have been given for free in aid by foreign governments and international organizations. 
  6. Directly imported articles for the exclusive use of disabled persons by organizations of disabled persons, and services provided by disabled individuals. 
  7. Nursing services provided by nurseries, kindergartens, pension institutions, and welfare institutions for the disabled, marriage introduction, and funeral services. 
  8. Academic education services provided by schools, and services provided by students through work-study programs. 
  9. Ticket income for cultural activities held by memorial halls, museums, cultural centers, management agencies of cultural relics protection units, art galleries, exhibition halls, calligraphy and painting institutes, and libraries, and ticket income for cultural and religious activities held by religious places. 

However, the draft VAT law has also omitted some tax-exempt items that were included in Circular 36. These are: 

  • Government funds or administrative fees collected by administrative units that meet certain conditions (stipulated in Article 10 of Circular 36) 
  • The transfer of copyright by individuals; and 
  • The sale of self-built houses for self-use by individuals. 

As mentioned in the section on transactions that are exempt from VAT above, the collection of government funds or administrative fees has been added to the list of tax-free items in the draft VAT law, meaning that it will be a tax-free transaction if the law is adopted. The other two items are not mentioned in the draft VAT law; therefore, it is unclear how they will be treated in the future. 

New end-of-period tax refund mechanism  

The draft VAT law adds a new VAT refund mechanism; however, this system has not been fully formulated yet. Article 20 of the second draft VAT law stipulates that “If the input tax is greater than the output tax in the current period, the taxpayer can choose to carry it forward to the next period for deduction or apply for a refund.”  It also states that “the specific measures shall be stipulated by the financial and taxation departments of the State Council”.  

How will the draft VAT law impact China’s tax system? 

In 2015, the STA released the Guiding Opinions on Comprehensively Promoting the Governing of Taxes according to Law (Shui Zong Fa [2015] No.32), stipulating that China will accelerate the process of upgrading relevant tax regulations into law, to improve the certainty of tax policies, enhance the authority of the tax documents, and ensure the efficiency of tax administration. The draft VAT law is therefore a part of China’s efforts to codify VAT within China’s broader tax regime. There are several other pieces of tax legislation that are similarly in need of development, as can be seen in the table below.

China value-added tax law

According to an explainer released along with the draft VAT law, VAT is the single largest tax category in China, accounting for 36 percent of the national tax revenue in 2021. The draft VAT law represents a concerted effort to improve China’s tax system and reduce the tax burden on key industries, such as manufacturing, construction, and transportation.  

At the same time, the explainer states that China’s current VAT system is “basically reasonable”, and the draft VAT law was drafted with the idea of gradually shifting the tax system while keeping the framework and tax levels relatively unchanged. For this reason, the draft VAT law will not drastically change China’s VAT system, and, if passed into law, will also not have a significant impact on businesses. 

There are, however, a few changes that will benefit businesses, such as the addition of new items into the scope of tax deductibles and more creditable items, and narrowed scope of deemed sales. At the same time, the removal of certain items from the scope of tax-exempt items may mean that companies will have to pay VAT on more types of transactions. However, more clarity is still needed on how some of these items will be classified. 

As the authorities are still collecting opinions from businesses and members of the public, it is also possible that we will see further changes to the draft before the final version is passed into law. 

It is important for businesses in China to take the time to assess the potential impact of the draft VAT law before it comes into effect, in order to properly prepare for any potential changes. This should include both any potential drawbacks and benefits to the company and an assessment of any necessary changes that the company can make to address a higher tax liability or to take advantage of the benefits. DSA’s tax professionals have a deep understanding of China’s VAT regime and in-depth industry knowledge and experience. Our experienced team can help with a wide spectrum of VAT assessments across all major industries. 

In addition, businesses are welcome to submit feedback, questions, and opinions on the draft VAT law to Dezan Shira & Associates by emailing so that our tax experts can consolidate the comments and submit them to the NPC for consideration.

This article was first published on January 31, 2023, and last updated on September 11, 2023.

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