China keeps small-car sales tax low to spur growth

China has announced it will continue to keep sales tax low on small vehicles, as part of an extended stimulus package to keep auto-industry growth going.

The sales tax rate on cars with engine capacity of 1.6 liters and below will be at 7.5 percent from January 1 to the end of next year. The tax rate was at 5 percent this year, but market watchers said next year's figure is still considered a cut because it is reduced from the original 10 percent.

Subsidies will continue to be offered for vehicle purchases in rural areas and to encourage car owners to trade in their old models for newer, fuel-efficient ones.

The revised stimulus does not cover cars with engine capacity of 2.0 liters and above, contrary to earlier expectations.

The incentives, along with other favorable policies targeting home appliance makers and industries working on fuel efficiency, were approved yesterday by the State Council and aimed to further boost domestic consumption next year.

The lower sales tax on cars, first introduced in February this year after the global economic crunch caused an industrial slump, was an overwhelming success in boosting auto sales in the country this year.

Total vehicle sales in China exceeded 12 million units for the first 11 months of this year, an increase of 42 percent from a year earlier, according to the China Association of Automobile Manufacturers. Among the segments, cars with engines smaller than 1.6 liters contributed 85 percent of the industry's growth, the association said.

But Zhang Boshun, an independent auto analyst, said growth in China's auto sales this year surged too rapidly and the revised stimulus may help stabilize the expansion in the market next year.

As expected, the central government also announced it would raise the subsidies as high as the equivalent of $26,360, a huge jump from the current equivalent of $878, for car owners who trade in their old vehicles for new ones next year.

Carmakers including General Motors and Volkswagen have been hoping the government will keep the stimulus next year, and most expect auto sales in China to rise 10-15 percent next year.

Inside Line says: China continues to fine-tune growth in the explosive auto industry.