The law consolidates existing regulations and introduces exemptions for various sectors.

On December 25, China approved a new value-added tax (VAT) law, which is set to come into effect on January 1, 2026. This law consolidates previous VAT regulations, including exemptions for certain goods and services, into a single document.

VAT, which is the largest tax category in China, contributed approximately 38% of the nation’s tax revenue in 2023. While the full details of the law were not disclosed, the latest draft includes provisions for exemptions on agricultural products, certain scientific research equipment, and goods for the disabled, as well as services provided by welfare institutions such as nurseries and elder care homes. Additionally, the government may expand the list of tax-deductible items to support specific sectors or businesses.

The introduction of the VAT law marks a significant milestone, as it brings 14 out of China’s 18 tax categories under their own specific laws, ensuring more comprehensive regulation of tax revenue, according to Xinhua.

This law was passed at the conclusion of the National People’s Congress Standing Committee’s session, which began on December 23. In related news, China has recently introduced various tax incentives aimed at boosting its property market, including VAT exemptions for individuals selling homes more than two years after purchase.

Furthermore, in September 2023, the Chinese finance ministry extended a VAT refund policy for research institutions purchasing domestic equipment, which will now run until the end of 2027. In 2019, China had already reduced the VAT rate for manufacturers from 16% to 13%, and for the transportation and construction sectors, from 10% to 9%.

Due to a slowdown in China’s economy, VAT revenue fell by 4.7% year-on-year in the first 11 months of 2023, totalling 6.1 trillion yuan (approximately S$1.2 trillion). However, in November, VAT revenue rose by 1.36%, signalling potential recovery in sales and business activity. Experts, including Tommy Xie of OCBC, suggest that this rebound in VAT collections may reflect strengthening economic vitality and a recovery in industrial profits, supporting broader economic momentum.