China Approves New VAT Law

BEIJING (Reuters) – China approved a value-added tax (VAT) law on Wednesday, set to take effect on January 1, 2026, according to Xinhua. This new law consolidates previous regulations, including tax exemptions for certain items.

Importance of VAT

VAT is the largest tax category in China, accounting for approximately 38% of national tax revenue in 2023.

Provisions of the Law

While the report did not specify the provisions, it noted exemptions for:
– Some agricultural products
– Imported instruments and equipment for scientific research and teaching
– Certain imported goods for the disabled
– Services provided by welfare institutions (nurseries, kindergartens, elderly care facilities)

The government may add new tax-deductible items applicable to specific sectors or businesses.

Legislative Context

The introduction of the VAT Law reflects China's commitment to statutory taxation, as it brings the total number of tax categories with dedicated laws to 14 out of 18.

The law was passed by the National People's Congress Standing Committee, which concluded its session on Saturday.

Recent Tax Incentives

Last month, China announced tax incentives for home and land transactions to aid the struggling property market, stating residents would be exempt from VAT if they sell their homes at least two years after purchase.

In September 2023, the finance ministry extended a VAT refund policy until the end of 2027 to encourage domestic and foreign research institutions to purchase Chinese-made equipment. Additionally, in 2019, the VAT rate for manufacturers was reduced from 16% to 13%, and for the transportation and construction sectors from 10% to 9%.

Economic Context

Due to a slowing economy, VAT revenue fell by 4.7% in the first 11 months of this year compared to last year, totaling 6.1 trillion yuan ($840 billion). November saw a 1.36% increase in VAT revenue.

Tommy Xie, head of Asia macro research at OCBC, commented that the VAT rebound indicates improving economic vitality, correlating with recovering sales and business activity, and may suggest a recovery in industrial profits.