China's latest reform of the value-added tax system for gold trading is expected to bring greater clarity and order to the market of the precious metal, as regulators aim to distinguish investment from consumption and strengthen oversight across the entire trading chain, said experts.

The reform comes at a time when global gold prices are flirting with record highs. By revising VAT rules in the segment, it is expected to cool speculative demand, close tax loopholes and strengthen oversight of off-market trades, they said.

The new policy, jointly issued by the Ministry of Finance and the State Taxation Administration — which took effect on Saturday — introduces a differentiated VAT system based on the principle of "tax exemption for investment, taxation for consumption". It refines levy procedures, extends supervision to banks and retailers, and leverages digital tools for real-time monitoring.

"This is a systematic reconstruction of China's gold-market mechanism," said Tian Lihui, university chair professor of finance at Nankai University.

"The biggest change is not just the rate itself, but how the entire supervision framework is being rewired — longer tax chains, differentiated treatment and digital oversight. It finally separates investment from consumption, which used to overlap in practice."

Under the new rules, standard gold traded on exchanges remains VAT-exempt as long as it isn't physically withdrawn. Once delivery occurs, trades are sorted into two streams — investment and non-investment — each governed by its own invoicing and deduction rules.

Investment gold — including bullion, coins and high-purity bars — continues to enjoy tax refunds or exemptions. Consumption gold, such as jewelry or industrial-use gold, faces a 6 percent deductible rate, down from 13 percent.

In simple terms, if a purchase is purely for investment through exchange trading without physical withdrawal, it remains lightly taxed or tax exempt. But once the gold is taken for personal or commercial use, a higher tax applies. Banks and retailers must now clearly identify the purpose of each purchase — investment or consumption — and apply taxes accordingly.

Zeng Gang, chief expert and director of the Shanghai Institution for Finance & Development, said the reform maintains support for exchange-based trading while adding long-missing precision.

"For the first time, the rules formally recognize the difference between financial investment and everyday consumption," Zeng said. "That alignment with market reality makes supervision far more effective."

He said the change will likely push more off-market trades onto regulated platforms, a shift that will strengthen market order and transparency over time.

The reform also reshapes how financial institutions and retailers interact with regulators. Banks and gold retailers must now link their operations directly with the national tax system, allowing authorities to monitor gold flows and fiscal data in real time.

"This creates a closed-loop framework that connects tax, finance and market supervision," Tian said. "Competition in the industry will gradually shift from price to compliance, promoting healthier consolidation and higher-quality growth."

Lou Feipeng, a researcher at Postal Savings Bank of China, said financial institutions will need to adjust product structures and invoicing systems to meet the new classification standards.

"While the short-term cost of compliance may rise, the reform will help standardize product design and align financial instruments with supervisory goals," Lou said.

He added that investors are likely to shift from physical accumulation plans toward standardized financial products such as gold exchange-traded funds, while banks could link accumulation plans with ETF products to meet different investment needs.

Following the policy's release, China Construction Bank and Industrial and Commercial Bank of China both announced on Monday they would temporarily suspend parts of their gold accumulation businesses to adjust systems and processes. ICBC, however, announced later on Monday the resumption of such business activity.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said the temporary suspension reflects prudence rather than panic.

Data from the Shanghai Gold Exchange show that the trading price of spot gold (Au99.99) was 914.6 yuan ($128.40) per gram as of noon Thursday, representing a year-to-date increase of nearly 50 percent. Analysts said the timing of the VAT reform — rolled out amid sharp price movements — signals authorities' intent to temper speculative trading and reinforce regulatory discipline.

Quite a few Chinese banks have been adjusting their accumulation of the yellow metal since October in response to the rapid price rises and growing investor demand. For example, Ping An Bank raised its minimum investment to 1,100 yuan from 900 yuan, effective Oct 24.