China VAT Rebate Policy Update 2025: Scope Narrows, Key Impacts

China has released its VAT rebate policy update in 2025, reducing eligibility for most industries, with only manufacturing, research, IT services, and ecological protection retaining full refunds. Businesses in other sectors face partial refunds and need to reassess their tax strategies.

On August 22, the State Tax Administration (STA) and Ministry of Finance (MOF) issued a notice revising the value-added tax (VAT) credit rebate policy in order to adjust tax incentives and increase fiscal revenue.

From September 2025 onward, only eligible taxpayers in the manufacturing industry, the scientific research and technical services industry, the software and IT services industry, and the ecological protection and environmental management industry (hereinafter “the four industries”) will be able to apply for a full refund of their end-of-period VAT credits. Companies in the real estate development industry, as well as in other industries, may still apply for rebates, but the refundable proportion will be lower than what was previously allowed.

VAT credits represent the excess of input VAT (paid on purchases) over output VAT (collected on sales). When input VAT is higher than output VAT, the excess is usually carried forward to offset future tax liabilities. The rebate policy allows certain companies to convert these unused credits into cash refunds in the current taxable period, improving liquidity.

This change marks a significant narrowing of the industries eligible for VAT credit rebates. The rebate system, first introduced in 2019, was broadened in 2022 to ease pressure on companies’ cash flows during the COVID-19 pandemic. (Read more: China’s VAT Rebates Policy: Eligibility, Timeline, and Procedures)

Companies that have been relying on VAT credit refunds should therefore reassess the potential impact of these changes on their cash flow and consider strategies such as adjusting investment schedules, restructuring supply chains, or exploring alternative financing to mitigate reduced access to rebates.

What are the changes to the VAT rebate policy?

1. Four key industries (Rule 1)

Taxpayers in the four industries can still apply every month (or every quarter for companies paying quarterly) to get a full refund of their unused VAT credit (the balance left at the end of the monthly or quarterly period).

The four industries are:

• The manufacturing industry;
• The scientific research and technical services industry;
• The software and IT services industry; and
• The ecological protection and environmental management industry.

Previously, taxpayers in 13 industries could apply for the full refund.

2. Real estate developers and operators (Rule 2)

Taxpayers in the real estate development industry can apply for a refund of 60 percent of the increase in the sixth month if:

• For six months in a row (or two consecutive quarters for quarterly taxpayers), their end-of-period input VAT credit kept increasing (that is, was always higher than zero).
• In the sixth month (or the second quarter for quarterly taxpayers), the increase is at least RMB 500,000 (US$69,901).

Real estate developers and operators that don’t meet these conditions can still apply for a refund under the “all other taxpayers” rules (see below).

3. All other taxpayers (Rule 3)

Companies that are not in the four industries or real estate, or real estate developers that do not meet the requirements outlined above, can now apply for a refund if:

• For six months in a row, their end-of-period input VAT credit kept increasing.
• In the sixth month, the end-of-period input VAT credits are at least RMB 500,000 higher than for the tax period immediately preceding the year to which the refund is applied.

The refund ratio depends on the size of the increase:

• If the increase is up to and including RMB 100 million (US$14 million), companies can apply for a 60 percent refund.
• If the increase is over RMB 100 million, companies can apply for a 30 percent refund for the portion exceeding RMB 100 million.

Previously, all companies that were not in one of the 13 industries (now four) were permitted to apply for refunds under Rule 2, without any limit on the amount. However, this rule is now limited solely to property developers. This means other companies are not able to claim back as much of the VAT credits as they previously could in the current period.

Who are eligible taxpayers?

The general eligibility criteria for companies within the four industries remain unchanged from the previous system. To qualify, companies must meet all of the following criteria:

• Have an A or B tax credit rating.
• Have not fraudulently obtained tax refunds for remaining credits, fraudulently obtained export tax refunds, or falsely issued special VAT invoices in the 36 months prior to the application.
• Have not been punished twice or more by the tax authority for tax evasion within 36 months of applying for the tax refund.
• Have not enjoyed other preferential VAT policies (i.e., “refund upon payment” and “refund after payment” policies) since April 1, 2019.

Companies operating within one of the four industries or real estate must also meet certain VAT sales thresholds in order to be eligible for the corresponding VAT refund rate. These criteria are summarized in the table below.

Note that VAT sales referred to in the table above include sales reported for tax purposes, sales recovered through audits, and sales adjusted through tax assessments. Where the VAT differential taxation policy applies, the amount before the differential is used to determine the ratio.

How do you calculate the refund amount?

The amount of VAT credits that can be refunded should be calculated according to the following formulae:

For the four key industries:

Refund amount = End-of-period VAT credit × Input credit composition ratio × 100%

For real estate developers

Refund amount = (Increase in VAT credit compared with March 31, 2019) × Input credit composition ratio × 60%

For other industries

Refund amount =

• (Increase in VAT credit up to RMB 100 million compared with December 31 of prior year) × Input credit composition ratio × 60%
   plus
• (Increase in VAT credit above RMB 100 million) × Input credit composition ratio × 30%

For rules 1 and 2, the “input credit composition ratio” is calculated based on VAT amounts shown on the seven types of deductible documents (special VAT invoices, customs import VAT payment certificates, tax payment receipts, motor vehicle invoices, toll electronic invoices, air ticket e-invoices, railway e-invoices) from April 2019 up to the tax period before applying for refund, divided by the total deductible input VAT in that period.

For Rule 3, the same method applies, but the time period is from January of the current year up until the tax period before applying for the refund.

Can you apply for both export VAT and credit rebate?

Yes, eligible companies can apply for both the export VAT exemption and rebate policy and the VAT credit rebate policy. However, as stipulated in the notice, companies should first apply for the export VAT exemption and refund. Only after this refund has been completed, if they still meet the criteria for the VAT credit rebate, can they apply for the rebate. Where the exemption and refund method is applicable, the corresponding input tax may not be used to refund retained VAT.

Can you carry forward the remaining VAT credits for deduction?

Yes, if a company does not apply for a refund, the remaining VAT credits at the end of the period can be rolled over to the next period and used to offset future VAT payable. If a company applies for a refund and the tax bureau approves it, the refunded amount is deducted from the VAT credit balance. If, later, it turns out the refund was claimed incorrectly, the company must pay it back in the next filing period. If the refund was obtained by fraud, the tax authorities will recover the money and deal with it according to tax law.

Why has China updated the VAT credit rebate policy?

Find Business Support

China has revised the VAT credit rebate policy in response to mounting pressures on tax revenue in recent years. According to data from the MOF, in the first half of 2025, total national general public budget revenue amounted to RMB 11.6 trillion (US$1.6 trillion), representing a slight decline of 0.3 percent year-on-year. Tax revenue specifically decreased by 1.2 percent to RMB 9.29 trillion (US$1.3 trillion), with notable contractions observed in corporate income tax (down 1.9 percent), import VAT and consumption taxes (down 6.1 percent), and tariffs (down 7.7 percent), while export tax rebates increased by 11.6 percent.

VAT also represents the largest share of the country’s tax regime, accounting for 38 percent of total tax revenue in 2024, meaning adjusting VAT rebate policies could have a considerable impact on increasing fiscal revenue.

Declining tax revenue constrains the government’s capacity to finance public services, social programs, and infrastructure development. The narrowing of the scope of VAT credit rebates seeks to limit the outflow of tax refunds and bolster fiscal revenue, thereby safeguarding stable government funding amid challenges arising from the real estate sector slowdown and subdued domestic consumption.

Next steps for impacted companies

Companies that are no longer fully eligible for the VAT credit rebate as a result of the changes should thoroughly review their current entitlements under the updated policy. This includes assessing which portions of the VAT rebate remain accessible and calculating the precise amounts that can be recovered. It is also important to evaluate the potential impact of these changes on their cash flow and overall liquidity, as reduced refunds may affect operational funding and financial planning.

Companies can also consider conducting a comprehensive review of other VAT-related policies and incentives to determine whether they qualify for alternative relief mechanisms. Many VAT policies introduced as fiscal relief for small companies during the COVID-19 pandemic have been extended until the end of 2027. These include VAT deductions for small-scale taxpayers, VAT refunds for hiring disabled employees, export VAT rebates, and other applicable tax incentives.

If your company may be impacted by the China VAT rebate policy update 2025, contact our tax advisors to review your eligibility and optimize your refund strategy. For any other support, please email China@dezshira.com.