New draft VAT Law consolidates existing rules, adding major reforms to bring into line with OECD guidelines
China has issued a new draft VAT Law to consolidate a number of existing VAT regulations, but also to continue the development of the rules inline with the OECD recommended guidelines. VAT accounts for over 35% of China’s tax revenues, the largest single tax contributor, and the government is anxious to improve its efficiency and neutrality for the benefit of taxpayers and the administrators.
The law is now under public consultation until the end of this month. The soonest implementation date is summer 2023. The draft replaces an unadopted 2019 proposed VAT Law reform proposal. China introduced its version of VAT in 1993. China e-invoicing is being updated too.
Major changes in 2023 Chinese VAT law
- Updating the place of taxation rules to identify the location of consumption as taxation jurisdiction within China. This includes digital services VAT changes: “for the sale of services and intangible assets, where the services and intangible assets are consumed within China, or the sellers are domestic entities or individuals”
- VAT credit refund and carry-forward improvements – to be clarified
- Consolidate goods and services VAT law
- Mixed or blended sales
- Non-taxable supplies extended to include salaries to employees and income from deposit interest
- Revised definitions of input VAT
- Changes to non-deductible items to include some internal catering, entertainment and transport services
- The role of withholding agents
- Simplified taxation rules
- Reducing the scope of deemed sales to self-supply and gifting
- VAT reporting periods
Draft VAT Law updates range of temporary VAT measures
The 2023 draft VAT Law would replace a long list of temporary measures introduced since 1993. This includes the 1993 Interim Regulations on VAT and the 2009 Detailed Rules for Implementing the Interim Regulations. Both of these laws have been extensively updated.
These laws create a two-tier VAT system:
- Small VAT payers subject to a flat 3% rate. The small VAT payer rate was cut from 3% to 1% for 2023. These taxpayers may not reclaim input VAT or refunds for exports.
- General taxpayers with standard rates varying from 13%, 9% and 6% depending on the type of supply
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