China passes new VAT law effective 01 January 2026
Brian Blömer
by Brian Blömer
On 25 December 2024, the Standing Committee of the 14th National People’s Congress (NPC) approved China’s first unified value-added (VAT) law, set to take effect on 01 January 2026. This landmark legislation strengthens China’s tax framework and reinforces Beijing’s commitment to a modern, standardised, and transparent tax system.
Background
Since its introduction in the early 1990s through interim regulations, China’s VAT system has undergone significant transformation. Key reforms included the shift to a consumption-based model in 2009, the phased expansion of VAT to services beginning in 2012, and full nationwide implementation in 2016. The official enactment of the VAT law marks the establishment of VAT as China's largest tax category, highlighting its vital role in economic growth and the optimisation of the tax structure.
As China’s largest tax category, VAT plays a crucial role in government revenue, generating RMB 6.9 trillion in 2023 – nearly 40% of total tax collections. In the first 11 months of 2024, VAT revenue remained strong at RMB 6.1 trillion. Covering goods, services, and real estate transactions, VAT impacts over 60 million taxpayers across China. The introduction of this law has drawn significant attention from policymakers and businesses, ensuring greater stability and predictability in China’s business environment, particularly for multinational companies.
China’s VAT framework
China classifies taxpayers into general and small-scale taxpayers based on a threshold set at RMB 5 million in yearly sales. Therefore, all companies exceeding the threshold are classified as general taxpayers, while those below are considered small-scale taxpayers. Small-scale taxpayers may voluntarily apply for general taxpayer status if they wish. The key differences are that small-scale taxpayers are subject to a simplified VAT rate of 3% for all goods and services, cannot deduct input VAT from their output VAT, and enjoy simplified compliance requirements.
For general taxpayers, the most common applicable VAT rates include 13% on goods, 9% on sales of necessity goods and transportation services, and 6% on most services.
What’s changing under the new law?
While the core VAT structure remains unchanged, ensuring tax stability, the new law introduces several key improvements aimed at modernising and standardising China’s tax system:
Formal legal framework: VAT now operates under a dedicated law rather than provisional regulations, reinforcing its long-term stability.
Standardisation across tax categories: With 14 out of China’s 18 tax categories now governed by specific laws, this marks a broader effort to improve tax governance.
Enhanced compliance clarity: The principle of “taxation by law” reduces discretionary enforcement and strengthens compliance transparency for businesses.
For companies operating in China, these changes bring a more predictable tax environment, allowing for better planning, risk management, and compliance strategies.
GGI member firm MSA AsiaHong KongBeijing, Shanghai, Shenzhen, ChinaT: +86 21 6352 0167
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MSA is a full-service accounting and strategic advisory partner, who assists foreign SMEs in the Chinese market with various accounting, finance and business needs. For over a decade we have been helping foreign companies with all their business needs in China, with a focus on high quality solutions.
As a Partner at MSA, Brian leads the corporate services division. Providing guidance to enterprises navigating the Chinese market, Brian's expertise spans various areas of service, including facilitating market entry, company establishment, corporate structuring, and managing company liquidations. Contact Brian.
