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China VAT credits struggle

New VAT law to alleviate slow credit refunds

China’s proposed new VAT law is undergoing a second reading for the Standing Committee of the National People’s Congress. A major pillar is how to improve the poor record of VAT credit refunds for taxpayers as well as extra powers to help small businesses.

VAT is China’s single largest tax revenue source at 5 trillion yuan (US$670 billion). China has also recently announced a 5-year extension to the zero-rating small business rate.

The draft new law includes devolving more VAT powers to the State Council and improved VAT credits. On the latter, businesses have been campaigning for action of local authorities’ delays in VAT overpayment refunds. Whilst an improved VAT refund policy was launched in 2019 to help cash flows for businesses as the economy slowed, there has been resistance on implementation.

Under the current refund scheme, local governments are required to cover 50 per cent of refunds and local businesses 15 per cent. China also needs to set the scale of tax refunds based on local revenues and review the distribution between central and local finances, Zhang said in an article published in August 2022. It also needs to lower the threshold for tax refunds for newly established enterprises to address their shortage of capital in order to “enhance market confidence and expectations.


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