Summary of Key Points
China is accelerating the process of cleaning up and standardizing tax incentives: Preferences related to people's livelihoods (such as public rental housing, home exchanges, elderly care, and childcare) will continue to be maintained, but many industry-specific incentives (such as certain VAT, consumption tax, and vehicle and vessel tax exemptions) are being phased out due to their outdated nature. This year, the efforts have been particularly significant, with more than 80 incentives being standardized in one go, making it the largest such cleanup to date. The process is not a blanket elimination but rather a gradual reduction, with a transition period in place, along with stricter enforcement (for example, by verifying the status of high-tech enterprises). In the short term, this may increase the tax burden on some companies, but in the long run, it will boost fiscal revenue and promote fair competition. A more standardized mechanism for managing tax incentives is also being established.
Which Incentives Have Been Retained? Which Ones Have Been Phased Out?
Retained: Preferences Related to People's Livelihoods
Incentives that are closely related to the daily lives of ordinary people will continue: for instance, public rental housing rentals are exempt from VAT, and residents who exchange homes are exempt from individual income tax (under certain conditions), as are taxes on community services such as elderly care and childcare. These policies are designed to support people's well-being and therefore are not likely to be canceled easily.
Phased Out: Incentives for Industries That Have Matured
1. VAT Incentives: Profit-making beauty salons will no longer be exempt from VAT on medical services; biological products (such as blood products) and projects where materials are provided by the client will now have to pay VAT at the standard rate of 13%, instead of the previous simplified rate of 3%.
2. Consumption Tax Incentives: Lithium-ion batteries and photovoltaic cells, which were previously exempt from consumption tax, will now be subject to a 4% tax (with the exemption for photovoltaic cells being extended until 2027).
3. Vehicle and Vessel Tax Incentives: Energy-efficient vehicles and electric commercial vehicles will no longer enjoy tax exemptions at the end of this year; from next year, they will have to pay the full amount of vehicle and vessel tax.
4. New Energy Vehicle Purchase Tax Incentives: The exemption has been reduced from 100% to 50%. For example, a car that previously saved 10,000 yuan in taxes now saves only 5,000 yuan.
Why are these incentives being phased out? Because the industries involved have matured—new energy vehicles, for instance, have a penetration rate of over 50% and no longer need tax support. Similarly, the national debt market has become more developed, so the VAT exemption on interest income should no longer apply.
What Are the Characteristics of This Cleanup?
The approach is not a blanket elimination but a gradual reduction, with the following features:
1. Transition Periods: For example, the consumption tax exemption for photovoltaic cells has been extended until 2027 to give the industry time to adjust.
2. Legalization: The opportunity to implement the VAT law was used to bring more than 80 incentives under a legal framework, avoiding arbitrary policy-making in the past.
3. Stricter Enforcement: More than 6,000 companies have had their high-tech status revoked since 2025, and they can no longer enjoy the 15% income tax exemption. Local governments are also prevented from granting special incentives to companies to avoid creating competitive advantages.
4. Differentiation Between Long-Term and Short-Term Incentives: For instance, incentives for offshore wind power have been retained (as it still needs support), while those for onshore wind power have been canceled (since the industry has matured).
What Are the Impacts on Companies and Finance?
Short-term Challenges for Companies
Some industries will face increased tax burdens in the short term. For example, companies in the biological products sector (such as Pailin Biology and Weiguang Biology) may see a significant decline in profits due to the increase in VAT from 3% to 13%. New energy vehicle manufacturers may also see reduced sales because consumers will have to pay more in purchase taxes. However, in the long run, companies will no longer rely on incentives but instead compete on product quality and technology, leading to fairer competition.
Positive Impacts on Finance
Fiscal revenue has increased this year, with VAT growing by 6% and vehicle purchase tax by 13.7%, thanks to the phasing out of these incentives. With more funds available, the government can allocate them to areas such as people's livelihoods and infrastructure development.
Why Is It Time to Standardize Tax Incentives Now?
1. Outdated Incentives: Some incentives are no longer relevant; for example, since new energy vehicles have become widespread, continuing to exempt them from purchase taxes is wasteful of public funds.
2. Fiscal Balance: Government revenue and expenditure are now roughly equal, so it is necessary to reduce unnecessary incentives to increase revenue.
3. Returning to the Purpose of Incentives: Tax incentives should support national strategies (such as technology and green development) rather than being used by local governments to attract companies in a unfair manner.
How Will Incentives Be Managed in the Future?
1. Establishment of an Exit Mechanism: New policies will be evaluated for their necessity before implementation, and old ones will be regularly reviewed and eliminated if they are no longer effective.
2. Clarity on Incentive Costs: Tax incentives will be managed similarly to government expenditures, with transparency about the amount of tax savings provided to specific industries.
3. Legalization of Incentives: Long-term valid incentives will be enshrined in law to prevent frequent changes and provide companies with stable expectations.
4. Resolution of Local Competition for Incentives: The distribution of fiscal resources between the central and local governments will be improved, so that local governments do not rely on incentives to attract businesses.
In summary, this regularization of tax incentives aims to “clear out outdated policies” and allocate them to areas that need more support (such as people's livelihoods and technology), while promoting fairer market competition. Although there may be short-term challenges, it will lead to a healthier economy in the long run.