China to scrap tax on small cars in green push

PUBLISHED : Thursday, 02 March, 2006, 12:00am
UPDATED : Thursday, 02 March, 2006, 12:00am

The National People's Congress is to announce next week the scrapping of a 3 per cent tax on small cars and an increase to 25 per cent in duties on larger vehicles, according to sources.

This comes after the central government said in January that it would introduce a policy encouraging the development of fuel-efficient cars.

Since the initial announcement by the authorities, the market has been expecting additional tax measures and incentives favouring smaller vehicles.

To promote an energy-conscious economy, the tax rate on cars with engine capacity of four litres or more will rise to 20 to 25 per cent from 8 per cent.

Cars in the 2.2 to 3.9-litre range will see only small adjustments. At present, the tax rates are 5 per cent and 8 per cent, respectively.

In a report by ABN Amro, analyst Cheuk Wan-fan said the new rate would drive a shift in car buying towards fuel-efficient small cars over petrol-hungry larger cars.

However, there have been concerns that Beijing's move would be at odds with local governments, many of which ban compact cars to protect the market for joint-venture car plants they operate with foreign partners.

Yale Zhang, a director of consultancy CSM Worldwide, had a different view.

Mr Zhang said cars with engine capacity of one litre or less were priced at 30,000 to 40,000 yuan, so the scrapping of the 3 per tax would have little effect.

China Association of Automobile Manufacturers data shows compact cars accounted for 20 per cent of national sales in the first 11 months of last year. Medium-sized cars with engines of less than 1.6 litres accounted for 66 per cent of sales.

Laurence Ang Siu-lun, an executive director of Hong Kong-listed Geely Automobile Holdings, said the industry was waiting for the central government to clarify what would qualify as a compact car.

If the government assessment only designates cars with engine sizes at one litre and below as 'compact cars', it is expected that the positive impact of the new measures may not be that obvious.