Will China scrap all car sales taxes?

Shanghai, January 21 (Gasgoo.com) China started on Jan. 20 to cut by half the sales / purchase tax to 5% on vehicles with engine sizes of less than 1.6 liters. This stimulus policy, intended to help boost the country's sluggish auto market, is well received by car makers, dealers and possible buyers alike.

On Day 1 of the tax cut, the new car registration in some Chinese cities, such as northeastern Changchun city which is home to China's auto giant FAW Group, doubled the previous daily registration, but that has not come up to expectations. Industry executives said that more effective measures should be taken to boost the auto sales, even by scrapping all the sales tax on more vehicles than the 1.6L-minus ones.

Why choose the 1.6L-minus vehicles for the sales tax cut? The authoritative answer is that in doing so, the Chinese government has expressed its constant favor for the energy-efficient and environmentally-friendly vehicles made by Chinese car companies.

Auto industry data show that there were about 3.1 million 1.6L-minus vehicles sold in China last year, with 61.54% market share of passenger cars in the country. Plus, vehicles of this engine size or emission level is the major battlefield for most local Chinese carmakers. Obviously, the tax cut will encourage customers to buy cleaner, Chinese-brand cars.

Official statistics showed that China's auto sales grew 6.7% year-on-year to 9.38 million units in 2008, the first single-digit growth since 1999, mainly dragged by weak demands amid global economic slowdown.

Is it possible for China to scrap all the car sales / purchase taxes? or to cut the current 5% to a lower level? This has been the wishful thinking of many car makers and potential buyers, but for the time being, it seems difficult and impractical for the government to take this measure which will erode a larger chunk of the nation's coffers.

China's sales of vehicles with engine sizes of less than 1.6 liters reached more than 3.1 million units in 2008, and are expected to grow by about 7% this year. That means the government will lose nearly 20 billion yuan ($2.93 billion) in auto sales tax revenue in 2009.

The government specified last week that the tax cut for small car sales / purchase would be effective from Jan. 20 through December 31, 2009. It remains to be seen whether this stimulus plan will remain to be applicable into 2010.

Possibly, the small-car tax cut will become history if China's auto market gets booming again next year and beyond. Anyway, Chinese automaker can't afford to adopt the "just wait and see" attitude -- rather they should become more innovative and competitive to boost their sales mainly by their own means.