China has officially approved a new Value-Added Tax (VAT) law, which will come into effect on January 1, 2026. The legislation was passed during the National People’s Congress Standing Committee session, which concluded on December 25, 2024.
The new law consolidates existing VAT regulations into a unified legal framework, marking a significant step in codifying tax policies and advancing the principle of statutory taxation. VAT, the largest tax category in China, accounted for approximately 38% of the country’s national tax revenue in 2023, according to official data.
A report by the state news agency, Xinhua, highlighted the broader context of China’s tax reforms: “With the introduction of the VAT Law, 14 out of 18 tax categories in China now have dedicated laws, covering the majority of tax revenue.”
Although the report did not detail all provisions of the new law, the latest draft includes exemptions for certain agricultural products, imported scientific research equipment, and goods or services related to welfare institutions, such as nurseries and elderly care facilities. The legislation also grants the government the flexibility to expand tax deductibles to support specific sectors or businesses.
The introduction of the VAT Law comes as China’s economy faces challenges, including declining domestic demand. Official figures reveal that VAT revenue for the first 11 months of 2024 dropped by 4.7% year-on-year to 6.1 trillion yuan (approximately S$1.2 trillion). However, a modest rebound of 1.36% in November suggests improving economic activity.
“The rebound in VAT reflects improving economic vitality, as sales and business activity recover. It may also indicate a recovery in industrial profits, further supporting economic momentum,” said Tommy Xie, head of Asia macro research at OCBC.
The VAT reform builds on earlier measures, such as the 2019 VAT rate cuts for manufacturers and the transportation and construction sectors. Analysts believe the codification of VAT regulations will provide greater clarity and stability for businesses operating in China, while also allowing the government to adapt tax policies to address emerging economic challenges.
As the VAT law’s implementation approaches, stakeholders will closely monitor its impact on China’s tax system, economic recovery, and industrial growth.
