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China introduces new VAT refund mechanism on a trial basis

The Announcement on Relevant Policies for Deepening Value-Added Tax Reform (Announcement [2019] No.39), jointly issued by Ministry of Finance, State Taxation Administration and General Administration of Customs introduces some of the major steps taken VAT reforms. Apart from further reduction of VAT rates in the regulation, it introduced new rules regarding refund of VAT credits.


One of the features of the Chinese VAT system is that excess input VAT credits are not eligible for direct VAT refund. Such excess input VAT credit can only be carried for forward for offset with output VAT in future tax periods. If one business is in a long state of having huge excess input VAT without sufficient output VAT to offset, it could cause considerable cash-flow issue carrying significant VAT credit non cash.


The Announcement No.39 introduced, for the first time, a VAT refund mechanism what will take effect from 1 April 2019 on a trial basis.


To be eligible for a refund of incremental VAT credit, a taxpayer needs to meet all the following conditions:

  1. As of the taxation period of April, 2019, the incremental VAT credit is greater than zero for six consecutive months (or two consecutive quarters if the VAT is paid quarterly), and the sixth month's incremental VAT credit is not less than CNY500,000;

  2. The tax payment credit rating is Grade A or Grade B;

  3. No fraudulent VAT credit rebate or export VAT rebate and no false issuance of special VAT invoice within the 3 year period preceding the applicable tax refund.