Tax Update | Major Update to China’s VAT Carryforward Refund Policy: Announcement No. 7 Establishes a Regularized System

Key insights: 

• VAT carryforward refund system becomes permanent and predictable
• Four sectors, including manufacturing, are eligible for full monthly VAT carryforward refund
• Once a company chooses between carryforward refund and immediate refund policies, the decision is irreversible for 36 months

In August 2025, China’s Ministry of Finance and State Taxation Administration introduced the “Announcement on Improving the Policy for Refunds of End-of-Period Value-Added Tax Carryovers” (Announcement No. 7). This new rule transforms the VAT carryforward refund policy—first introduced in 2019—from a temporary measure into a permanent system after several years of reform.

For Manufacturing companies in China, this change brings more predictable cash flow planning and clearer compliance rules. In this newsletter, we summarize the key updates and explain how manufacturing companies can best take advantage of the new policy.

Policy Background: From “Temporary Relief Measures” to “Permanent System”

Announcement No. 7 replaces several previous temporary policies and establishes a long-term, stable VAT refund mechanism. The new framework strengthens support for manufacturing, technological innovation, and green development. For eligible companies, claiming a monthly refund of VAT carryforward credits becomes a predictable, regular process.

Key Changes: Tailored Measures for Three Categories of Taxpayers

Announcement No. 7 divides taxpayers into three categories based on their industry and sales mix. Each category has its own refund schedule and calculation method. Manufacturing companies fall into Category 1, which receives the most favorable treatment.

How Manufacturing Companies Determine Eligibility and Calculate the Refund

1.  Determining Industry Status

To qualify for the “full monthly refund”, the company’s VAT sales from manufacturing activities (as defined in the National Economic Industry Classification) must account for more than 50% of total VAT sales.

Calculation period: The 12 months before the refund application. If the company has been operating for less than 12 months but at least 3 months, the actual operating period will be used.

2. Basic Eligibility Requirements

To apply for a refund, the company (not limited to manufacturing companies) must meet all of the following conditions:

• Tax Credit Rating: Grade A or B.
• Compliance Record (over the past 36 months) :

No improper input VAT refunds, export tax refunds, or fraudulent VAT invoices.

No more than two penalties for tax evasion.

• Policy Compatibility: Has not benefited from the VAT “immediate refund” or “collection-and-refund” policies since April 1, 2019

3. Calculating the Refund Amount

The refundable input tax credit is determined by two factors: the input VAT credit balance at the end of the period and the input tax composition ratio.

The input tax composition ratio refers to the proportion of the VAT amount indicated on VAT deduction vouchers to the total input tax deducted during the same period.

Important Policy Choice: Carryforward Refund vs. Immediate Refund

Announcement No. 7 provides companies with greater flexibility but introduces a binding lock-in period:

• Switching Mechanism: If the company has previously benefited from the VAT “immediate refund” or “collection-and-refund” policy, you can choose to repay all refunds you received under those policies. Starting the month after repayment, you may apply for the carryforward refund.

• Lock-in Rule: Once you choose either the carryforward refund or switch back to the immediate refund policy after repayment, you cannot change the choice for 36 months.

Our Recommendations

Manufacturing companies typically have significant investments, leading to substantial input VAT from equipment purchases. Carefully evaluate the long-term tax position. If you plan large capital expenditures (e.g., building new facilities, purchasing machinery), opting for the carryforward refund policy generally frees up cash flow faster. If the enterprise operates in a low or zero-tax environment, a careful comparison of the long-term benefits of both policies is essential. Specifically, clients may consider the following actions.

Immediate Self-Assessment:

Industry Status: Confirm whether the “manufacturing” sales proportion exceeds 50%. If the business has diverse operations, adjust the accounting methods to potentially qualify for the optimal policy.

Credit Rating and Compliance: Check the tax credit rating (must be A or B) and review the compliance record over the past 36 months to ensure there are no disqualifying issues.

Optimize Input Tax Management:

Ensure all deductible input invoices (especially customs payment vouchers and special VAT invoices) are compliantly recorded, as the “input tax composition ratio” directly impacts the refund amount. For manufacturers, customs import VAT payment vouchers are often significant; ensure their accuracy.

Cash Flow Forecasting and Planning:

Take advantage of the certainty of the “monthly refund” to improve the cash flow projections.

Make a Prudent Policy Choice:

If you are currently benefiting from the “immediate refund” policy, perform a thorough tax calculation. Assess whether repaying those refunds to switch to the carryforward policy is more beneficial, or whether retaining the existing policy is preferable. Since the decision locks in for 36 months, it must be based on the medium-to-long-term business planning.