China officially approved a new Value Added Tax (VAT) law, which will take effect on January 1, 2026.
The legislation approved during the session of the Standing Committee of the National People's Congress that concluded on December 25, consolidates existing regulations into a single legal framework.
VAT, which constitutes the largest tax category in China, accounted for about 38% of national tax revenue in 2023, according to official data.
The law aims to codify tax policies, marking significant progress in the implementation of the principle of legal taxation.
According to a report by state news agency Xinhua, “With the introduction of the VAT Law, 14 of the 18 tax categories in China have their own laws, covering most of the tax revenue.”
While the report does not detail specific provisions, the latest draft included exemptions for certain agricultural products, imported scientific research equipment, and goods or services related to welfare institutions, including daycare centers and elderly care centers.
Additionally, the government retains the flexibility to expand tax deductibles to support specific sectors or businesses.
China's decision to formalize VAT regulations comes as its economy faces challenges, including weakening domestic demand. VAT revenue for the first 11 months of 2024 fell 4.7% year-on-year to 6.1 trillion yuan (S$1.2 trillion), although November showed a modest rebound of 1.36%.
“The rise in VAT reflects an improvement in economic vitality, as sales and business activity recover. It may also signal a recovery in industrial profits, further supporting economic momentum,” said Tommy Xie, head of Asia macroeconomic research at OCBC.
The VAT reform builds on previous measures, such as the 2019 VAT rate cuts for manufacturers and the transport and construction sectors.
Additionally, tax incentives introduced in 2023 aim to boost struggling industries, including the crisis-hit real estate market and research institutions, with exemptions and refund extensions until 2027.
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