Definition: VAT and Consumption Tax
VAT (also known as value-added tax) and consumption tax in accounting are treated differently. A value-added tax is paid by sellers along the production chain including those that are coming from suppliers, manufacturers, distributors, and retailers.
On the other hand, consumption tax is imposed on specific items such as those relating to energy (for example, oil, alcohol, tobacco, etc.) or luxurious commodities (for example, vehicles, jewelry, cosmetics, etc.). Consumption tax has a role to play in regulating the production, spending power and behavior of consumers.
Draft Contents and Modifications
The draft for comments regarding VAT law consists of 47 articles, while the consumption tax law has 21. Each draft consists of several items including the following:
According to the draft law on consumption tax, China’s cabinet will be responsible for any tax adjustments to be made on various goods as deemed necessary. The members are also able to launch pilot programs which will make tax rate adjustments possible, inlcuding taxation on certain products. Article 20 of the draft states that:
The State Council can implement consumption tax reform on a trial basis, adjust the tax items, tax rates, and collection links of consumption tax, and the pilot scheme shall be reported to the Standing Committee of the National People’s Congress for the record.
Furthermore, the consumption tax law considers the reform of the division of income between the local and central governments. Thus, the State council members can also organize relevant tax adjustments to continue improving the local tax system.
On the other hand, the VAT law maintains the current tax structure and tax burden level. This is because the reform measures for VAT legislation (from 2012 to 2016) have already matured.
Nevertheless, the government drafted the VAT law in order to raise fiscal revenue and to introduce a modern fiscal system based on Chinese socialist characteristics. This new kind of tax system is also focused on VAT tax declaration and invoice management. It aims to improve efficiency and prevent any tax ambiguities.
Recently, China has been making a lot of changes in its taxation system to cater for its financial opening-up. Suffice to say, this also encourages foreign entrepreneurs to have more leeway in doing business. Furthermore, public opinions on tax-related matters manifest China’s continued efforts to elevate its business tax system and democratize its legislation.
China intends to show adherence to the OECD’s international VAT/GST guidelines with the VAT law. According to this guideline, the VAT should only be applicable for consumption and excess input VAT credits should be allowable for a refund.
In 2016, the Finance Ministry and tax administrators released a series of circulars including Circular Caishui  No. 36. This detailed the shift from China’s business tax system to a VAT pilot program. However, this approach did not overcome the different systems for goods and services. Thus, it led to the introduction of VAT law.
Previously, VAT and consumption tax in China was on the provisional regulation level. With the release of the draft laws, both tax considerations have been enhanced to a state level.
The Chinese leadership continues to promote a socialist market economy at all policy levels. Therefore, the VAT and consumption tax laws at the state level forge a modern fiscal system that aligns with the same principle.