Law of the people’s Republic of China on Value-Added Tax (Draft for Consultation)

On 27 November 2019, the Ministry of Finance and the State Taxation Administration of the People’s Republic of China (“PRC”) released the Law of the People’s Republic of China on Value-added Tax (Draft for Consultation) (“Draft Law”). The consultation period has closed on 26 December 2019, and the Draft Law may be promulgated once the National People’s Congress of the PRC has deliberated on and approved the same. We set out, below, a summary of the key changes compared with the current laws in the PRC (“Current Laws”) on value-added tax (“VAT”).

Status of Small-Scale Taxpayers

Under the Current Laws, small-scale taxpayers[1] whose total quarterly sales exceed RMB 300,000 are required to pay VAT at a rate of 3% on the sales amount, without deducting the input VAT.

The Draft Law incorporates the existing requirement of a taxpayer satisfying the total quarterly sales threshold of RMB 300,000 before it will be liable to pay VAT. While small-scale taxpayers are not expressly mentioned in the Draft Law, the Draft Law does provide for a simpler method for calculating the amount of VAT payable, at a rate of 3% on the sales amount, without deducting the input tax amount, which may be an indication that, subject to further clarifications from the relevant authorities of the PRC, taxpayers with limited sales amount may be eligible to use the simpler method to calculate the amount of VAT payable under the Draft Law.   

Definition of “Taxable Transaction”

The taxable transaction, as defined in the Current Laws, refers to the sale and import of goods, and the sale of labour services relating to processing, repairing and replacement, services, immovable properties, and intangible assets. The sale of financial products is not expressly referred to in the Current Laws, but is, in practice, treated as an item subject to the VAT rate of 6% that is applicable to the “service” category.

In the Draft Law, the sale of financial products is expressly listed as part of the “service” category. Given that the “service” category will continue to be subject to the VAT rate of 6%, there is likely to be no practical differences brought about by this change. It should be noted that only the sale of financial products where the seller is a domestic entity or individual or where the financial products are issued domestically are subject to VAT.

Territorial Requirement of Taxable Transactions involving Sale of Service

Both the Current Laws and the Draft Law provide that taxable transactions that, inter alia, occur within the territory of the PRC are subject to VAT. In particular, under the Current Laws, VAT will have to be paid where the seller or purchaser of service (excluding the lease of immovable properties) is within the territory of the PRC unless the sale of service was conducted wholly outside of the PRC.

The Draft Law, however, stipulates that VAT is payable for the provision of services if the seller is a domestic entity or individual, or if the service is consumed in the PRC. By including the latter as a basis for the imposition of VAT, the Draft Law appears to be more consistent with the destination principle espoused by the Organisation for Economic Co-operation and Development (OECD), whereby tax is levied in the taxing jurisdiction in which service is consumed. The practical effect of the approach in the Draft Law is that foreign individuals and/or entities providing services that are consumed in the PRC will have to account for VAT, while the fact that service recipients are within the PRC does not necessarily render the transactions liable to VAT. It should be noted that the purchaser will be the withholding agent where foreign individuals and/or entitles conduct taxable transactions within the territory of the PRC, regardless of whether or not the foreign individual and/or entities have a business institution within the PRC.

Mixed Sales

The Current Laws define a “mixed sale” as one sale that involves both goods and services, and the VAT rate for a mixed sale is the VAT rate that applies to the main business of the entity.

The Draft Law eliminates the requirement that a sale must involve both goods and services to be considered a mixed sale, and defines a mixed sale as one sale that involves two or more tax or levy rates. The Draft Law continues to apply the prevailing calculation method for mixed sales: in other words, the relevant VAT rate that applies to the main business will be used to calculate the VAT payable in a mixed sale.

Deemed Sales

Under Current Laws, VAT is payable for deemed sales, which refer to, inter alia, the provision of free services (otherwise than for public welfare or for the public), and the transfer of intangible assets or immovable properties without consideration (otherwise than for public welfare or for the public). Likewise, the Draft Law specifies certain situations whereby transactions will be considered “deemed sales”, including but not limited to:

  1. the use of self-manufactured goods for public benefit or self-consumption;
  2. the provision of goods for free otherwise than for public welfare; and
  3. the transfer of intangible assets, immovable properties or financial products without consideration, otherwise than for public welfare.

In essence, the Draft Law, amongst others, retains the exception for the provision of intangible assets or immovable properties for free in the course of public welfare, such that these transactions will not be considered “deemed sales”, but removes the provision of free services from the ambit of “deemed sales”.

Refunds of Excess Input VAT

Over the past few years, the PRC government implemented trial programs for the refund of excess input VAT for qualified entities within specific industries and extended the refund policy to all industries starting from 1 April 2019.

The Draft Law entrenches the refund policy, which provides that the difference between the input VAT and output VAT may be carried forward to the next tax period or refunded where the amount of input VAT exceeds the amount of output VAT in a tax period. The details of the refund mechanism will be published by the relevant finance and tax authorities of the PRC.

Tax Period

The Current Laws provide for a tax period of one (1) day, three (3) days, five (5) days, ten (10) days, fifteen (15) days, one (1) month, or one (1) quarter. The applicable tax period of taxpayers is determined by the tax authority of the PRC, taking into account, inter alia, the amount of VAT payable and whether VAT can be paid on a regular periodic basis.

To reduce the frequency of tax filing and, in turn, lessen taxpayers’ compliance burden, the Draft Law removes the tax period of one (1) day, three (3) days, and five (5) days, while adding a new tax period of half a year. It should be noted that the tax period of half a year does not apply to taxpayers who adopt the general method for calculating the VAT payable, which, inter alia, permits the input VAT to be deducted from the output VAT.

Consolidation of VAT

The Current Laws as they stand do not permit consolidation of VAT for two or more taxpayers, as the relevant provision was subsequently repealed. The Draft Law reintroduces the possibility to consolidate VAT of two or more taxpayers, subject to the taxpayers meeting the criteria to be promulgated by the relevant tax authority of the PRC in due course. This may further reduce the taxpayer’s compliance burden and costs, and should, in principle, be well-received by the business community.


The Draft Law provides for a transition period such that existing tax policies, if necessary, may continue to apply for a maximum period five (5) years from the date that the final version of the Draft Law comes into effect. Overall, the Draft Law simplifies and clarifies certain areas of prevailing VAT policies, but, pending the publication of the final version of the Draft Law and its relevant measures, its effects remain to be seen.


The foregoing is a summary of various aspects of the law which we thought may be of interest to you. It is not intended, nor should it be considered, as being legal advice.

[1] i.e. taxpayers whose accumulative sales amount subject to VAT in the past 12 months does not exceed RMB 5 million.