Key Changes to Input Tax Deduction under China’s New VAT Law || Ebner Stolz Asia

Significant adjustments have been made to the rules governing input tax deduction under China’s new VAT Law and its Implementation Regulations. To help taxpayers understand these policy adjustments and ensure compliance, we have reorganized the current scenarios where input tax cannot be deducted and provided a detailed comparison with the previous regulations.

China’s new Value-Added Tax (VAT) Law and its supporting Implementation Regulations (VIR) (effective since January 1, 2026) systematically categorize situations where input tax deductions are not allowed into five basic categories, making them clearer and more practical than those under the previous regulations。

Current Policy-Based Non-Deductible Input Tax Scenarios

The new VAT Law and its Implementation Regulations specify that the following circumstances where input tax is not eligible for deduction against output VAT:

Basic scenarios outlined by VAT Law:

Article 22 of VAT Law:

input tax corresponding to items subject to the simplified VAT method
input tax corresponding to the VAT-exempt item
input tax corresponding to items involving abnormal losses
input tax on goods, services, intangible assets, and real estate purchased for collective welfare or personal consumption
input tax on catering services, daily household services, and entertainment services purchased for direct consumption
Other input tax as stipulated by the State Council

Additional rules supplemented by VIR:

Article 21 of VIR:

input tax corresponding to interest expenses and other costs (e.g., investment and financing advisory fees, handling fees, and consulting fees) paid to the lender that are directly related to such loan services

Article 22 of VIR:

input tax related to non-taxable transactions

Article 25 of VIR:

input tax related to long-term assets (fixed assets, intangible assets or real estate) used for general VAT-taxable items and the items outlined in sections I to V above, with a value exceeding 5 million RMB. The portion of non-deductible input tax shall be calculated and adjusted on a yearly basis in accordance with the relevant rules

Major Changes in comparison to the Old Policies

Aspect	Old Rules	New Rules	Impact
Catering, Entertainment & Personal Services	Blanket Non-deduction. Input tax was non-deductible regardless of business purpose .	Purpose-Oriented Deduction. Non-deduction applies only if purchased directly for consumption.	This connects the deduction chain for enterprises in certain industries, such as tourism.
Loan Services	Non-deductible. Interest and related financial expenses were strictly non-deductible .	Temporarily Non-deductible (with a caveat) . The term “temporarily” is added, allowing for future policy evaluation to expand the deduction scope .	Although still non-deductible, the law leaves room for future deduction. Long-term contracts may consider tax change clauses.
Mixed-Use Long-term Assets (Fixed assets, intangible assets and real Estate)	“Specifically for” test. If an asset was not “specifically” used for exempt purposes (mixed-use), the input tax was often fully deductible .	“CNY 5 Million Threshold”. For assets >5M, deduct first but adjust annually based on actual usage ratio (annual reversal). Assets ≤5M remain fully deductible .	High-value assets require lifecycle tracking and annual adjustments, increasing accounting and compliance requirement .
Abnormal Losses	Scattered Scope. Included “design services” consumed by real estate under abnormal loss, causing disputes .	Narrower Scope. Removed “design services” from reversal requirements. Clarified that the loss must be either “caused by mismanagement” or “caused by regulatory violations”.	Clarify the definition of losses and adjust the scope of deductions.
Unallocatable Input Tax	Annual Settlement Optional. Monthly calculation was normal, but annual settlement depended on tax authority discretion .	Mandatory Annual Settlement. Taxpayers must calculate monthly and perform a mandatory year-end settlement during the January filing period next year.	Enterprises must actively manage allocation, shifting from passive tax authority inspection to proactive enterprise compliance
Non-Taxable Transactions	Unclear Definition. No clear definition of “non-taxable” transactions.	Explicitly Non-deductible. Legally clarifies that input tax for non-taxable transactions (specific equity transfers, bond transfers) is non-deductible .	Enterprises should pay attention to this change if they have certain non-taxable income, such as government subsidies, income from share transfers, etc.

Considering these systemic changes, we recommend that businesses establish long-term asset ledgers; fulfill their annual settlement obligations for input tax that cannot be allocated; and reasonably break down service components. For transactions where VAT input tax deductions are unclear, we advise consulting professional tax advisors in advance to ensure compliant treatment.

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Rachel Wang

Senior Associate