Top Stories

The Past, Present and Future of VAT Reform in China

By Rainy Yao and Zhou Qian
Posted: 1st September 2014 08:34
At the start of 2012, China launched a massive reform to replace BT with VAT, two of the country’s three major indirect taxes. Prior to the reform, VAT was levied only on the sale and import of tangible goods and on the provision of processing, repair, and replacement services. Meanwhile, BT was levied on the provision of all other services as well as the transfer of intangible and real assets. In this article, we survey the past, present and future of VAT reform for its unavoidable and thoroughgoing consequences for foreign investors with operations in country.

VAT is considered a neutral tax, allowing businesses to offset VAT incurred in relevant purchases from their VAT liability. Conversely, BT is levied on gross turnover with no deduction permitted for tax paid when purchasing other goods or services. The two taxes are generally not mutually deductible. Replacing BT with VAT means that the risk of double taxation is eliminated, as the sale of goods and the provision of services will no longer be treated separately. This is expected to enhance the competitiveness of companies in the service sector and encourage them to upgrade their infrastructure. Under the VAT reform, enterprises will be able to deduct tax from the purchase of goods, fixed assets and services used in their business.

VAT payers are separated into two categories – general taxpayers and small-scale taxpayers – with tax rates varying between the two. The two categories are also associated with two distinct methods for calculating VAT payable: the general and simplified calculation methods are used for general and small-scale taxpayers, respectively.

General Calculation Method

 - VAT payable = Current output VAT – Current input VAT
*Output VAT refers to the VAT amount calculated according to the sales volume of the taxable services provided and the applicable VAT rate.
**Input VAT refers to the VAT paid by the taxpayer when purchasing goods or receiving processing, repair and replacement services and other taxable services.

Simplified Calculation Method

Under the simplified calculation method, no input VAT is deductible and a uniform 3 percent levying rate applies:

 - VAT payable = Sales volume * VAT levying rate (3 percent)


First implemented in Shanghai in 2012 for the transportation and certain modern service sectors, the VAT pilot reform was expanded to Beijing in September 2012, then to Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei later that same year. On August 1, 2013, the VAT pilot reform was implemented nationwide.
To date, the VAT pilot reform has been applied to railway transportation, postal services, telecom (starting June 1, 2014) and certain modern service sectors such as IT services and film and television services. By the end of June, 2014, the number of pilot taxpayers had increased by 690,000 to 3.42 million from 2.73 million, including 640,000 general taxpayers (19 percent) and 2.78 million small-scale taxpayers (81 percent).

RELATED:Implications of the VAT Reform in China

Furthermore, the VAT reform has substantially lessened the burden for enterprises, with more than 96 percent of taxpayers witnessing a decrease in their tax burden. During the first half of 2014, tax payable was reduced by RMB 85.1 billion due to the VAT reform, said  Guo Xiaolin, spokesman for the State Administration of Taxation (SAT).


The most definitive targets for the future of VAT reform in China are contained in the Twelfth Five Year Plan Period (2011-2015), which stipulates that all sectors currently subject to BT should have switched over to VAT by the end of the period. Reinforcing this, on July 28, 2014, the State Council released the “Circular on Accelerating the Development of the Production Services Industry and Promoting Industrial Restructuring and Upgrading (Guo Fa [2014] No.26)” which urged that VAT reform be expanded to all service sectors as soon as possible.
This article was first published on China Briefing.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
For further details or to contact the firm, please email or visit

Related articles