From the Ministry of Finance website here in China (boring, I admit but an answer to the OP's question):

Briefing of VAT Under China's Tax System

Tax Policy Department

Ministry of Finance

China started to implement VAT in 1984 on 24 specified taxable items. In 1994, corresponding with reform goal of building up socialist market economy system and pursuant to the guideline of "unification of taxation management, equity of tax burden, simplification of tax system, reasonalization of revenue distribution relations and guarantee of the financial revenue", the former taxation system undertook an overall and structure reform. On December 13, 1993, the State Council of China promulgated "The Provisional Regulation of the People's Republic of China on Value Added Tax"，which put into effect on January 1, 1994 and is currently effective in China.

VAT is administered by the State Administration of Taxation (the import VAT is collected by the customs on behalf), and the revenue from it is shared between the central government (75%) and local governments (25%). VAT is the major source of fiscal revenue for the Government of China, particularly the central government. In 2002, the revenue from VAT is 814.1 billion yuan, accounting for 47.61% of the state total tax revenue of the year, which is the first biggest tax in China.

1. The current VAT system of China

⑴ Taxpayers

According to The Provisional Regulation of P.R.C on VAT, Value-added tax should be paid by enterprises or individuals who sell merchandise, provide processing, repairing, or assembling service, or import goods within the territory of the People's Republic of China on the added value derived from their production, selling merchandise, providing industrial repairing or assembling service.

⑵ Taxable items and tax rates

Based on different taxable goods, services, different flat rates and zero rate are adopted. The table of the taxable items and rates is as following:

Table of VAT Taxable Items and Rates

Coverage of collectionRateExportation of goods(except otherwise stimulated by the state)0

Agriculture, forestry, products of animal husbandry, aquatic products;

Edible vegetable and grain duplicates;

Tap water, heating, cooling, hot air supplying, hot water, gas, liquefied petroleum gas, natural gas, coal/charcoal products for household use;

Book, newspapers, magazines(excluding the newspapers and magazines distributed by the post department)

Feeds, chemical fertilizers, agricultural chemicals, agricultural machinery and plastic converting film for farming;

Selected metal mineral products, Selected non-metal mineral products, coal.

 13%

Crude oil, mine salt and goods other than those listed above;

Taxable services.

17%

⑶Computation of tax payable

There are two kinds of VAT taxpayer in China by the criterion of turnover of sale goods & services and condition of accounting system. One is normal taxpayer, the other is small taxpayer. The standard of decision of Small Taxpayer is ①where the taxpayer is engaged in the production of goods or in the provision of taxable services as his sole or principal business and his annual turnover is less than RMB ¥1,000,000; or ② where the taxpayer is engaged in the wholesale or retail of goods and his annual turnover is less than RMB ¥ 1,800,000. However, A Small taxpayer who maintains a sound accounting system and is able to provide accurate accounting records for taxation purposes may be registered as a General Taxpayer.

A. Normal taxpayer

To compute the VAT payable, the normal taxpayer needs to separately calculate the output tax and the input tax for the current period. Then the difference between the output tax and the input tax shall be the actual amount of VAT payable. The formula for computing the tax payable is:

Tax payable=Output tax payable for the current period－Input tax payable for the current period;

Output tax payable=Sales volume in the current period×Applicable tax rate.

B. Small taxpayer 

Small taxpayers are taxed on the basis of the revenue derived from sales of goods or provision of taxable services by applying proper rates(4% for commercial sector, and 6% for other sectors). The computing formula of tax payable is:  Tax payable=Sales amount×Applicable rate.

C. Importation

The importation goods are taxed on the basis of the composite assessable price by applying the applicable tax rate. The formula for computing the tax payable is:

Tax payable=Composite assessable price×Applicable VAT rate

Composite assessable price=Customs completion price＋Custom Duty

Where the taxpayers import the taxable goods under the Consumption Tax, the Consumption Tax payable shall be included in the composite assessable price.

D. VAT refund for exporters

In case of 0 rate applicable to the exported goods, the exporters may apply to the tax authorities for the input tax refund on those goods exported. At present, the refund rates consist of 3%, 5%, 8%, 13% and 17%.

⑷ Major tax exemptions

The exempted items include: the agricultural production materials as ruled, the self-produced primary agricultural products sold by agricultural producing units and individuals; contraceptive medicines and devices; antique books purchased from the public; instruments and equipment imported for direct use in scientific research, experiment and education; imported materials and equipment granted, gifted by foreign governments or international organizations; materials imported directly to support the poverty relief and charity cause donated freely by overseas natural persons, legal persons and other organizations; articles imported directly by organizations for the disabled for exclusive use by the disabled; and the taxable services provided by individual disabled laborers.

2. The main problems of VAT

Broadly speaking, there are three major types of value added taxes in the world corresponding to the gross national product, net national product, and consumption basis. They are the GNP type, income type and the consumption type. In China, the type of VAT is the GNP type. That is to say, the input tax of fixed-assets, such as houses, construction and equipment, can't be deducted from the output tax when computing the tax payable. The VAT of GNP type ensures that the government can get more tax revenue, but would limit the increase of investment. Thus, this is one problem of China's VAT that should be settled in the short future.

Secondly, in some industries of China, such as construction, transportation, and services etc, the state doesn't collect VAT but Business Tax. Business Tax is levied as a percentage of sales, not just value added. In China, Taxable services for Business Tax is include transportation, construction, finance and insurance, post and telecommunications, cultural activities and sports, entertainment businesses and services. It is not equitable and increases the difficulties of computing taxes that different industries are levied on different type of tax.

3. The preparative reform for VAT in China

For making an equitable market environment and stimulating the investment, the government of China prepares to make a reform of VAT, which will change the type of China's VAT from the GNP type to the consumption type. On July 1, 2004, the state selected several north-east provinces as experimental area to implement the VAT of consumption type. In these provinces, the tax payers of VAT in eight selected industries can deduct the input tax of equipment used for production. With the development of Chinese economy and the increase of reform experiences, the central government will implement the VAT reform in all industries and provinces of China. What’s more, for setting up a uniform and equitable turnover tax system, some industries subjected to Business Tax would be levied on VAT at an opportune time.

VAT = Sales tax. Almost every nation has it (or a variant) usually though the price is added to the item BEFORE the price is tagged onto the item. Also certain goods are exempt, e.g. food and children's clothes the idea is it's only supposed to go on luxury items, (although as always you then have hugely varying definitions of 'luxury').

For businesses it's a pain in the rectum, as you have to keep itemised accounts of everything you buy and sell and what category they come under then work out the tax (often different goods have different rates) basically you have to employ an accountant just to do your tax return, great for accountants, great for government, piss poor for small businesses.