China's small car tax incentives to have limited effect

"Support low-emission vehicles and restrain high-emission vehicles" is apparently the goal of the latest automobile sales tax adjustment. Its real influence on China's car market, however, remains to be seen.

On August 14 the Ministry of Finance and the State Administration of Taxation revealed an adjustment of car sales taxes from September 1, 2008, increasing the tax rate for cars with emissions higher than 3.0 liters, at the same time cutting it for those with emissions lower than 1.0 liter.

This is the second car sales tax adjustment since April 1, 2006, aimed at restraining the production and sales of high-emission cars while encouraging the making and selling of low-emission cars. 

According to China Association of Automobile Manufacturers statistics, sales of cars with emissions lower than 1 liter saw a dramatic drop in the first half of this year to only 129,100, falling by 3.86% over the same period last year. First-half-of-the-year SUV sales volumes, by contrast, increased by 42.01% over the same period last year.

Automobile Market May Not Be Seriously Affected

To what extent will the tax adjustment affect car sales? Many experts say the influence will be minimal.

Analysts believe that tax-adjusted prices for high-emission cars will not rise drastically. Due to rumors about the tax increase, prices for many high-emission cars have already themselves been adjusted, so now the market is fully prepared for the higher tax. Moreover, this tax rise is gentle and will not greatly affect the average price in the market.

Low-emission cars are already very cheap now, and a sales tax cut will not drop prices significantly.

An official in Toyota Motor (China) Investment Co., Ltd., said Toyota was formulating strategies to cope with the new policy, and said it was difficult to judge the influence of the tax adjustment on the sales of high-emission cars. 

Experts from China Automobile Trading Co. estimate that after the tax adjustment, the price for exported cars with emissions between 3 liters to 4 liters will increase by about 13%, and that for cars of 4 liters or above will increase by 33%. As these costs are aimed directly at consumers, it is hoped this will restrain the demand and help to change the current structure of the car market. 

But sellers in Beijing of high-emissions cars are still enjoying healthy turnover. The price for a RMB 500,000 car will increase by some thousands or tens of thousands after the tax adjustment. But for those who really want to buy them, the price increase is no barrier because they are mostly rich people who are not particularly price sensitive, so any influence the tax boost will have on the high-emission car market is doubtful.

Experts and analysts agree, and say it’s more a guiding opinion than a mandate.

People buying cars with public funds don’t need to pay the tax themselves. Other buyers need only pay the sales tax once, when they buy the car. For private owners, the car is also a symbol of status, and many will choose to just accept the extra cost. 

After this adjustment, the government is expected to release more policies, such as raising road maintenance fees for high-emission cars and imposing a fuel tax, which may put a bit more bite into small-emission incentives.

But Bai Jingming, a Ministry of Finance expert, repeats that the policy adjustment is more of a guide, and the government is unlikely to come down too heavily due to economic factors.