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2 February 20232 minute read

Review of the Draft VAT Law and call for Public Consultation

Country-specific update: China

China released the first draft VAT law on 27 December 2022.  The aims of the VAT law are (i) unifying the VAT rules for goods and services under a single substantive VAT law; and (ii) upgrading the status of the current VAT regulations-based system to a formally enacted law. 

Compared to the current VAT regulations, the draft VAT law brings major changes by clarifying or introducing the following:

  • a place of consumption approach is adopted for determining the place of taxable activities for VAT;
  • “deemed sale” activities for VAT purposes;
  • the definition of withholding agent for VAT;
  • the applicable VAT rates for taxpayers using a simplified method for paying VAT;
  • the scope of non-creditable input VAT;
  • the scope for VAT exemptions;
  • the VAT treatment of a mixed sale transaction, which involves taxable activities subject to different tax rates;
  • the use of electronic VAT invoices; and
  • the information exchange rules for information sharing among tax authority and other government departments.

The consultation process for the draft VAT law is open from 30 December 2022 to 28 January 2023. After collecting comments from the public, China’s legislation body will conduct internal review and submit and updated version of the VAT law for second reading at National People’s Congress.


Key takeaway

China implemented a significant tax reform by replacing business tax (which was applicable to services and not goods) with VAT in 2016 in order to ease the tax burden of companies. After the said reform, taxable services were governed by a VAT pilot program. 

The draft VAT law aims to convert the VAT pilot program (applicable to services which were previously subject to business tax) and VAT rules (applicable to the manufacturing and sale of goods) into a single substantive VAT law and also to clarify certain tax issues.  It is advisable for taxpayers to closely monitor the legislation process and make applicable operation adjustments regarding the upcoming changes.