The more input value-added tax (VAT) that is allowed to be credited, the less VAT a company must pay. The VAT Law and its implementing regulations have officially taken effect this year, with a major change being the expansion of items eligible for corporate tax credits. The general calculation method for VAT payable is output VAT minus creditable input VAT; therefore, a greater amount of creditable input VAT results in lower VAT payments for enterprises. Prior to 2026, relevant VAT regulations explicitly stipulated that the input VAT on purchased dining services, resident daily services, and entertainment services could not be credited against output VAT. Article 22 of the VAT Law implemented this year adjusts this provision, stating that the input VAT corresponding to dining services, resident daily services, and entertainment services purchased by taxpayers and directly used for consumption cannot be credited against output VAT. Compared to previous regulations, this new wording adds the phrase "directly used for consumption."
Ge Yuyu, an associate professor at the Shanghai National Accounting Institute, analyzed that the provision prohibiting the crediting of input VAT for dining, resident daily, and entertainment services "directly used for consumption" implies that if these services are not for direct consumption but are instead used for production and business activities related to taxable transactions, their input VAT can be credited against output VAT. Tian Zhiwei, Dean of the Public Policy and Governance Research Institute at Shanghai University of Finance and Economics, stated that this change modifies the previous "one-size-fits-all" approach in VAT regulations that disallowed tax credits for purchased services like dining. This means that if the services purchased by a company are not directly used for final consumption but serve as an intermediate link in production and business activities, the corresponding input VAT may fall within the creditable range.
"The core logic behind this change is to better reflect the 'neutrality principle' and the 'integrity of the credit chain' of VAT," Tian Zhiwei said. He explained that the ideal state of VAT is to tax only the value added at each stage, avoiding double taxation. When a company purchases services like dining for resale or as a component of its own taxable services, these services represent production inputs rather than final benefits for the company. If credit is not allowed, the credit chain is interrupted, leading to double taxation on that portion of value. The adjustment in the new regulations aims precisely to prevent such breaks in the credit chain.
Currently, the implementing regulations of the VAT Law do not provide further explanation for the term "directly used for consumption" mentioned in Article 22. Ge Yuyu believes that so-called direct use for consumption includes scenarios such as a business owner treating friends or relatives to a meal at a restaurant, which is clearly unrelated to production and business activities and thus naturally ineligible for credit. When a company entertains clients at a restaurant to facilitate a deal or secure an order, it is theoretically related to production, business, and taxable transactions; however, under the current relevant provisions of the VAT Law, this is also not creditable.
Ge Yuyu indicated that the currently confirmed scenario where input VAT on dining, resident daily, and entertainment services *can* be credited is the "purchase for resale" situation. For example, when a travel agency purchases dining services from a restaurant to resell to tourists, this is a typical case of use for a "taxable transaction." It is expected that this year, travel agencies will be able to credit the input VAT from special VAT invoices obtained from restaurants against their output VAT. This measure helps to complete the VAT credit chain and reduce the tax burden. Li Jun, a tax partner at PwC China, noted that this change in the VAT Law means that e-commerce platforms reselling dining, daily life services, and entertainment services can now credit the input VAT contained in the special VAT invoices they obtain from merchants.
Of course, precisely how companies should operationalize this change in practice still awaits further clarification from the relevant authorities. Companies can also communicate proactively with their competent tax authorities to mitigate potential risks. Looking at the history of VAT reform, the scope of creditable input VAT has been continuously expanding. For instance, following the comprehensive rollout of the Business Tax to VAT reform in 2016, China首次允许不动产纳入进项抵扣范围. In 2019, the input VAT on domestic passenger transportation services was included in the creditable range. When deploying measures to deepen fiscal and tax reforms, the Third Plenary Session of the 20th Central Committee called for improving the VAT credit refund policy and the credit chain.
Shi Zhengwen, Director of the Center for Fiscal and Tax Law Research at the China University of Political Science and Law, believes that insufficient creditability is a key reason for the heavy VAT burden on some enterprises. He suggests that future VAT reforms need to focus on improving the VAT credit system, an impact potentially as significant as a tax rate reduction.
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