China?s value-added taxes contribute a large percentage of China?s annual tax revenue and account for a significant proportion of tax liabilities for many Chinese enterprises. They affect companies that sell, manufacture, process or repair tangible goods in China and can be quite complex. In 2003, China began a massive reformation of its VAT system, launching pilot programs in Northeast China. Following the program?s success in the provinces of Heilongjiang, Jilin, and Liaoning, the central government implemented the VAT reforms nationally in 2009.

China started to implement VAT in 1984 on 24 specified taxable items and on December 13, 1993, the State Council promulgated “The Provisional Regulation of the People’s Republic of China on Value Added Tax” with the intent of ?unifying taxation management, equalizing the tax burden, simplifying the tax system, and guaranteeing financial revenue.? This law, which codified China?s VAT system, has been in use ever since.

In 2004, China introduced VAT reforms in the provinces of Heilongjiang, Jilin and Liaoning in an effort to revitalize the old industrial base of Northeast China. The method of ?increment deduction? was adopted and the scope of the reform confined to eight industries: equipment manufacturing, petrochemical, metallurgy, automobile, shipbuilding, new- and high-tech industries, and agricultural products processing. Following the success of the pilot reform in the Northeast, it was extended in 2007 to 26 old industrial base cities in the Central Chinese provinces of Henan, Hunan, Hubei, Shanxi, Anhui and Jiangxi. In the second half of 2008, five areas of eastern Inner Mongolia and the earthquake devastated region of Wenchuan in Sichuan Province were also designated as VAT reform pilot areas.

China?s move from a production?based VAT system to a consumption-based one began in earnest in 2009 when the government implemented VAT reform nationwide. With the exception of specific industries that the state has mandated are to be restricted, all industries in China now fall under the VAT reform system and companies are able to offset the full amount of input VAT paid on newly purchased machinery and equipment against VAT collected when they sell their products.

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