China plans to reform its VAT to tax consumption sites, not production, to boost domestic demand and reduce overcapacity.

China is planning a major overhaul of its VAT system, shifting tax collection from production sites to consumption locations as part of its 15th Five-Year Plan. Expected to be discussed at the upcoming Communist Party meeting, the reform aims to reduce local government incentives for industrial expansion and overcapacity by rewarding consumer markets instead. Currently, the VAT—China’s largest tax source—favors production hubs, fueling competition that has led to excess capacity in sectors like photovoltaics. The change is intended to support a long-term shift toward a consumption-driven economy, promoting domestic demand and more balanced growth.