Chinese VAT System

China’s value-added tax (VAT) system is governed by the Interim Regulations on VAT, which were elevated to formal law status through the VAT Law, effective 1 January 2026. The VAT is China’s largest source of tax revenue, accounting for approximately 40% of total tax revenue. The system has undergone significant reforms since 2012, including the replacement of business tax with VAT (ying gai zeng) and the implementation of the Golden Tax Project.

The VAT Law

The VAT Law (Zengzhi Shui Fa), effective 2026, codified and reformed the previous Interim Regulations on VAT. The Law establishes: the scope of VAT (goods, services, and intangible assets supplied in China); the standard rate (13%); reduced rates (9% for basic necessities, 6% for services); the zero rate (exports); and exemptions (agricultural products, educational services, financial services).

The Law also addresses: place of supply rules (where the supplier or the recipient is located); time of supply (the earlier of invoice issuance, payment receipt, or supply completion); input tax deduction rules; and special schemes for small-scale taxpayers and financial services.

Standard Rate Categories

The standard VAT rate of 13% applies to: most tangible goods; processing, repair, and replacement services; and leasing of movable property. The reduced rate of 9% applies to: agricultural products; books, newspapers, and magazines; utilities (water, gas, electricity); real property (sales and construction); and transportation services. The reduced rate of 6% applies to: most services (including financial, professional, and technology services); intangible assets; and certain cultural and sports services.

The VAT registration threshold for small-scale taxpayers is RMB 5 million in annual revenue. Small-scale taxpayers are subject to simplified VAT calculation (3% or 5%, without input tax deduction). The 2026 VAT Law maintained the simplified scheme for small-scale taxpayers while making it optional for those who prefer the standard deduction-based calculation.

Input Tax Deduction

Input tax deduction is a fundamental feature of China’s VAT system. Registered taxpayers may deduct VAT paid on purchases (inputs) from VAT collected on sales (outputs). The deduction requires: a valid VAT invoice (fapiao); the invoice must be issued by a registered taxpayer; and the purchase must be used for taxable supplies.

Input tax deduction is not available for: purchases used for exempt supplies; purchases for personal consumption; entertainment expenses; employee welfare; and passenger transportation (with limited exceptions). The 2026 VAT Law maintained the prohibition on input tax deduction for these categories.

Small-Scale Taxpayers

Small-scale taxpayers (xiao gui mo na shui ren) are businesses with annual revenue below RMB 5 million. They are subject to simplified VAT at 3% (standard) or 5% (real property) without input tax deduction. Small-scale taxpayers may opt to be treated as general taxpayers where the standard deduction-based calculation is more favorable.

The simplified scheme reduces compliance costs for small businesses and eliminates the need for detailed input-output tracking. The 2026 VAT Law provided additional simplification measures for small-scale taxpayers, including: quarterly (rather than monthly) filing; simplified reporting forms; and exemption from certain record-keeping requirements.

Simplified Methods

Certain supplies are subject to simplified VAT calculation, where the taxpayer may apply a deemed input tax deduction without actual invoices. Simplified methods apply to: second-hand goods (deemed deduction of purchase price); construction services for old buildings; and public transportation services.

The simplified methods reduce compliance costs for industries where obtaining input invoices is difficult. The 2026 VAT Law codified the simplified methods previously established through administrative regulations.

E-Invoice System (Fapiao)

China’s electronic invoice (fapiao, 发票) system is a cornerstone of VAT administration. The Golden Tax Project Phase IV (completed 2025) established a fully electronic fapiao system that: issues invoices electronically; transmits invoice data to the tax authority in real time; verifies invoice authenticity automatically; and matches input and output tax data.

The e-fapiao system has transformed tax compliance. Taxpayers issue invoices through the National Taxation Administration’s online platform, and transaction data is automatically reported to the tax authority. The system has: reduced invoice fraud; improved compliance; enabled real-time tax collection; and reduced compliance costs.

Golden Tax Project Phase IV

The Golden Tax Project Phase IV (Jinshui Si Qi) is the most advanced tax administration system in the world. The system integrates: real-time transaction data from e-fapiao; enterprise bank account monitoring; third-party data (including customs, social insurance, and property registration); and AI-powered risk analysis.

Phase IV enables the tax authority to: monitor transactions in real time; identify suspicious transactions automatically; cross-reference data across multiple sources; conduct risk-based audits; and enforce compliance efficiently. The system has significantly reduced tax evasion and has improved the efficiency of VAT collection. Phase IV has been controversial for its implications for taxpayer privacy and the extensive data collection it enables.