China’s Premier Li Keqiang has announced, in the Annual Government Working Report to the National People’s Congress, held in March that Value Added Tax (“VAT”) reforms will be fully implemented and expanded from 1 May 2016 to include the construction, real estate, financial and consumer services industries.

The VAT reform project, officially launched as a trial programme in Shanghai in 2012, aims to consolidate the longstanding dual indirect tax system: VAT historically was levied on the supply of goods and the provision of repair, processing and replacement services at a rate of 13% or 17%, and business tax (BT) was levied on the provision of other services and the transfer of intangibles and real property at rates of 3% to 20%. The coexistence of the VAT and BT systems created a number of issues, such as double (or multiple) taxation because an input tax credit was available for VAT payers, while no such mechanism was available for BT payers. The reform aims to resolve the double taxation issue and to foster the development of specified modern service industries by gradually transitioning these industries from BT liability to VAT liability.

Since then, the program has expanded to several municipalities and provinces and has been applied to various sectors including railways, postal services, telecommunications and certain service industries. Once China’s VAT reform is fully implemented nationwide, China will have one of the most advanced VAT regimes in the world.

The four sectors subject to the last round of VAT reform and their applicable rates are as follows:

  • Construction services (Current BT Rate 3%; Applicable VAT Rate 11%)
  • Real estate (Current BT Rate 5%; Applicable VAT Rate 11%)
  • Financial and insurance (Current BT Rate 5%; Applicable VAT Rate 6%)
  • Consumer services (Current BT Rate 5%; Applicable VAT Rate 6%)


It is expected that the Ministry of Finance (“MOF”) and the SAT will jointly announce a detailed policy reform by April this year with a launch date of May 1, 2016. It is also anticipated that taxpayers will be granted an additional 10-day period to complete the VAT filings for May and June, as a transitional measure,

Contrast with EU VAT                                    

Although China borrowed many basic principles from the European VAT, the Chinese VAT has evolved differently, so the recent proposals are very different from the VAT systems of the EU. For example, in the financial and real estate sectors, most suppliers are exempt though some are taxable whilst others carry the right to opt to tax. Those supplying goods and services into China will need to be aware of the VAT implications as law and practice develops. It is hoped that the SAT will learn from the European experience of VAT in formulating laws and practices, so that problems can be alleviated. Financial services and real estate VAT are two of the most complex areas of EU VAT and much can be learned from the European Court of Justice case law.


  1. Taxanalysts: “China’s VAT Experience”, Xu Yan, <$ file/YAN-25.pdf>;
  2. International Tax Review: “Final phase of China VAT reform to be implemented”, Sarah Chin, Li Qun Gao, 2016, <http://www. -VAT-reform-to-be-im plemented.html>;
  3. DLA Piper: “China expands VAT reform to new sectors”, Daniel Chan, Doris Ho , Tina Xia, 2016, <https: // /~/media/Files/Insights/Publications/2016/03/China%20Expands%20VAT%20Reform%20to%20new%20sectors.pdf>.