Following the enactment of the new VAT law and the issuance of implementation regulations, China’s State Taxation Administration (STA) issued updated guidance on 1 January 2026, replacing the prior framework dating from 2018. The new rules, which apply as from the date of issuance, shift VAT administration toward automatic, fact-based qualification. Key changes include a narrower elective scope for small-scale taxpayer status, earlier effective dates for general taxpayer recognition, retroactive sales attribution, expanded access to input tax credits and the removal of probationary requirements.
Narrower Eligibility for Small-Scale Taxpayer Status
The previous rules allowed non-enterprise entities and enterprises with infrequent taxable transactions to elect small-scale taxpayer treatment. Under the new framework, only non-enterprise entities that both do not frequently engage in taxable transactions and primarily conduct business activities outside the scope of VAT may make this election. Enterprises whose annual taxable sales exceed RMB 5 million (measured over any continuous 12-month period or four quarters) must register as general VAT taxpayers and may no longer opt into small-scale taxpayer status.
Earlier Effective Date of General Taxpayer Status
General taxpayer status now takes effect retroactively from the first day of the period in which the taxpayer’s sales exceed the threshold rather than allowing the taxpayer to elect whether general taxpayer status takes effect on the first day of the current month or the first day of the following month when completing registration. The main change is that the effective date is no longer based on the timing of VAT registration, but on the objective fact of exceeding the sales threshold, as a result of which registration becomes a procedural confirmation rather than a trigger for status. The former gap period—during which taxpayers could continue as small-scale—has been eliminated.
Revised Timing for Recognising Sales in Tax Reassessment Cases
Sales identified through self-correction or audit reassessment must now be attributed to the original period in which tax liability arose, rather than the month in which the reassessment is reported. If the recalculated sales for that period exceed the general taxpayer threshold, the taxpayer is reclassified as a general taxpayer and must apply the standard VAT rates (i.e., 13% for goods, 9% for transportation, 6% for services) for all affected periods. This may result in substantial additional tax and late payment surcharges. For reassessed sales relating to periods before 1 January 2026, the effective date of general taxpayer status cannot be earlier than 1 January 2026.
Allowance for Remedial Input Tax Credits
Under the old rules, taxpayers that exceeded the small-scale taxpayer threshold but failed to timely register as a general taxpayer were barred from claiming input VAT credits for the relevant period. The new rules adopt a more facilitative approach: from the effective date of general taxpayer status, taxpayers may claim eligible input VAT credits on a rolling basis provided compliant invoices have been obtained. This enables taxpayers to review and claim credits from past periods after completing registration.
Abolition of the Probationary Period
The long-standing probationary period management mechanism for newly registered VAT general taxpayers has been abolished. New general taxpayers may immediately issue invoices and claim input tax credits. Taxpayers currently in a probationary period may use any prepaid VAT balance to offset future tax liabilities or apply for a refund.
The new rules increase both compliance complexity and the potential for retroactive tax exposure. Small-scale taxpayers should consider taking proactive steps to mitigate risk:
Gordon Gao
Erica Zhang
BDO in China
Highlights of the New Rules
Narrower Eligibility for Small-Scale Taxpayer StatusThe previous rules allowed non-enterprise entities and enterprises with infrequent taxable transactions to elect small-scale taxpayer treatment. Under the new framework, only non-enterprise entities that both do not frequently engage in taxable transactions and primarily conduct business activities outside the scope of VAT may make this election. Enterprises whose annual taxable sales exceed RMB 5 million (measured over any continuous 12-month period or four quarters) must register as general VAT taxpayers and may no longer opt into small-scale taxpayer status.
Earlier Effective Date of General Taxpayer Status
General taxpayer status now takes effect retroactively from the first day of the period in which the taxpayer’s sales exceed the threshold rather than allowing the taxpayer to elect whether general taxpayer status takes effect on the first day of the current month or the first day of the following month when completing registration. The main change is that the effective date is no longer based on the timing of VAT registration, but on the objective fact of exceeding the sales threshold, as a result of which registration becomes a procedural confirmation rather than a trigger for status. The former gap period—during which taxpayers could continue as small-scale—has been eliminated.
Revised Timing for Recognising Sales in Tax Reassessment Cases
Sales identified through self-correction or audit reassessment must now be attributed to the original period in which tax liability arose, rather than the month in which the reassessment is reported. If the recalculated sales for that period exceed the general taxpayer threshold, the taxpayer is reclassified as a general taxpayer and must apply the standard VAT rates (i.e., 13% for goods, 9% for transportation, 6% for services) for all affected periods. This may result in substantial additional tax and late payment surcharges. For reassessed sales relating to periods before 1 January 2026, the effective date of general taxpayer status cannot be earlier than 1 January 2026.
Allowance for Remedial Input Tax Credits
Under the old rules, taxpayers that exceeded the small-scale taxpayer threshold but failed to timely register as a general taxpayer were barred from claiming input VAT credits for the relevant period. The new rules adopt a more facilitative approach: from the effective date of general taxpayer status, taxpayers may claim eligible input VAT credits on a rolling basis provided compliant invoices have been obtained. This enables taxpayers to review and claim credits from past periods after completing registration.
Abolition of the Probationary Period
The long-standing probationary period management mechanism for newly registered VAT general taxpayers has been abolished. New general taxpayers may immediately issue invoices and claim input tax credits. Taxpayers currently in a probationary period may use any prepaid VAT balance to offset future tax liabilities or apply for a refund.
BDO Takeaways
The new rules increase both compliance complexity and the potential for retroactive tax exposure. Small-scale taxpayers should consider taking proactive steps to mitigate risk:
- Review historical sales: Because the new rules can apply retroactively, any underreported or adjusted sales from 2025 or earlier that push total taxable sales above the small-scale taxpayer threshold during any 12-month period may trigger general taxpayer status from 1 January 2026, along with back taxes, late fees and penalties. A prompt review of past declarations is essential.
- Strengthen VAT credit documentation: Once classified as a general taxpayer, businesses must standard VAT rates and rely on compliant VAT credit documents to manage their tax burden. Ensuring timely collection, verification and proper use of valid invoices is critical to minimising tax liability and avoiding disallowed credits.
Gordon Gao
Erica Zhang
BDO in China