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The Thirteenth Meeting of the Standing Committee of the Fourteenth National People's Congress (NPC) voted on December 25 to adopt the Value-Added Tax (VAT) Law, which will come into effect from January 1, 2026 onwards. As the number one tax in China, with its taxpayers covering the vast majority of market players, the introduction of the VAT Law is a significant progress in the implementation of the principle of statutory taxation. As this legislation, in general, follows the idea of tax leveling, it basically maintains the current tax framework and tax burden level; however, there are some improvements and modifications in some specific systems, which are worth paying attention to.

01The enactment and adoption of the VAT Law is a significant progress in the implementation of the principle of statutory taxation
With the introduction of the VAT Law, 14 of China's 18 existing taxes have been enacted into law, especially since VAT is the first major tax in China, and its legislation itself is of landmark significance for the principle of statutory taxation.
In the legislative process, the principle of statutory taxation has also been fully realized. First of all, the existing policies have been elevated to laws. Many provisions in the VAT Law are existing tax policies, which are elevated to law through legislation.
Secondly, the scope of authorization of tax legislation is strictly limited. In the process of legislative deliberation, some of the circumstances in the draft that were originally authorized to be stipulated by the State Council, such as the underpinning circumstances of deemed taxable transactions and the special circumstances of taxing in accordance with the simplified method that were originally authorized to be stipulated by the State Council in the draft, have been deleted and replaced by the law to be stipulated directly.
Finally, some of the necessary authorization legislation will be reviewed for the record. For example, the starting point of value-added tax and the adjustment of standards for small-scale taxpayers, etc., although authorized to be stipulated by the State Council, need to be reported to the Standing Committee of the National People's Congress for the record.
02The legislative idea of tax leveling to ensure the stability of the tax system
As the VAT legislation is generally based on the idea of tax leveling, it maintains the stability of the existing tax framework and the level of tax burden basically unchanged. Although the content of the VAT Law has increased a lot compared with the existing provisional regulations on VAT, it has absorbed many existing tax policies and elevated the existing relevant policies and regulations to the law.
As a result, the stability of the tax system is ensured on the whole. For example, the existing three tax rates, i.e., 13%, 9% and 6%, are still maintained, while zero tax rate is still applied to exported goods, cross-border sales of services and intangible assets, and the simplified tax calculation method is applied to small-scale taxpayers and others. In addition, many existing relevant policies, such as those relating to small-scale taxpayers and tax retention and refund policies, have been improved and elevated into law, also ensuring the continuation of relevant tax policies and preferential measures.

03 There are a number of modifications and improvements in the specific system, and the following points are worth noting
1. Specific criteria for small-scale taxpayers have been clarified and directly stipulated in the law. The VAT Law clearly stipulates that small-scale taxpayers, are taxpayers whose annual taxable VAT sales do not exceed five million yuan.
2. The levy rate of the simplified tax calculation method has been unified. Only the 3% tax rate is retained and the 5% tax rate is abolished for the calculation of VAT payment by the simplified tax method.
3. The tax credit refund system has been improved. It is clearly stipulated that taxpayers have the right to independently choose the treatment of tax credits, i.e., they can choose to carry forward the credits to the next period or apply for refund. At the same time, however, it is stipulated that the choice should be made “in accordance with the provisions of the State Council”, which means that the State Council is authorized to stipulate the relevant specific measures. Currently, the current tax refund policy, for the return of tax credits set a lot of conditions, the future implementation of the specific situation, depending on the follow-up of the State Council's relevant provisions.
4. Reducing the circumstances of “deemed taxable transactions”, and deleting the provision authorizing the State Council to prescribe other circumstances in the second review draft. Compared with the existing various types of deemed sales, the scope of deemed taxable transactions in the new law is greatly reduced, and only three types of deemed taxable transactions are stipulated, and there is no authorization provision. It means that except for these three types of deemed sales, the rest are no longer categorized as deemed sales.
I found that in the legal business may be involved in the goods for investment, as well as the distribution of goods to shareholders of the two types of the original “deemed sales” behavior, under the new law is not included in the scope of the “deemed taxable transactions”. In this regard, does it mean that it is no longer a taxable transaction, or do these two types of transactions no longer need to be “deemed”, but directly belong to the taxable transaction? The author personally believes that it is more reasonable to categorize them directly as taxable transactions. These two types of behavior we can split it into two simultaneous transactions, which investment in goods, can be split into the sale of goods and investment in currency; similarly, the distribution of goods to shareholders, can be split into the sale of goods and dividends in currency. The sale of goods naturally belongs to the taxable transaction, so even if it is not included in the deemed taxable transaction, it is more reasonable to pay tax according to the sale of goods in the “taxable transaction”.
5. Anti-avoidance measures have been added, and the sales amount will be adjusted even if it is obviously high. For the adjustment of sales, in addition to the tax authorities can adjust the sales of obviously low sales without justifiable reasons, the new “sales of obviously high” situation. Thus, taxpayers can avoid the behavior of avoiding tax by intentionally increasing the sales price, improperly adjusting the sales between related parties, and taking advantage of the preferential treatment of tax credit or tax rebate.