Tax break for buying small cars extended for another year

Ministry of Finance raises sales tax on vehicles under 1.6-litres from 5 to 7.5pc, taking effect Jan 1 – but that’s still below the normal 10pc

PUBLISHED : Thursday, 15 December, 2016, 7:25pm
UPDATED : Thursday, 15 December, 2016, 11:01pm

Chinese carmakers, dealers and buyers received bad news and good on Thursday, after the government confirmed it will raise the sales tax levy on small-engine vehicles in January 1, but the charge will remain below normal levels for another year.

The sales tax on vehicles with 1.6-litre engines or smaller will be raised to 7.5 per cent, the Ministry of Finance said in a statement. The government cut the 10 per cent purchase tax to 5 per cent in October 2015, amid sluggish sales and in an effort to cut emissions.

The tax break was widely expected to expire completely as planned, but there had also been suggestions in the market that officials might hold off on any increase.

Extending the tax break for one more year, the ministry added, the levy will resume to a normal rate of 10 per cent in 2018.

Instead of resuming it back to 10 per cent, setting the tax rate at 7.5 per cent for next year will provide a cushion for a slowdown in car sales
Zhang Zhiyong, leading independent automobile market analyst

According to the China Association of Automobile Manufacturers (CAAM), a government-backed industry group, China’s car sales in the first 11 months rose by 14.1 per cent to 24.95 million units from the same period of last year.

Small-engine vehicles accounted for 15.63 million sales, increased by 22.5 per cent from the previous year, as buyers scrambled to order cars before the tax break expired.

CAAM is now forecasting a full-year sales growth of 13.9 per cent to 28 million vehicles this year, but said that could slow to 6 per cent next year, with total car sales of 29.68 million as the tax break is extended. It had said sales growth could have slowed to 2 per cent if the tax break was withdrawn.

Dong Yang, executive vice chairman of CAAM, said the increase in tax will inevitably drag on car sales next year, but the current arrangement of extending the tax break provided a buffer to the market.

He urged, however, the measure to encourage the purchase of small-engine vehicles should be extended longer term.

While the tax rate is to be raised, the government should also consider alternative measures to help boost consumption of small-engine cars, he added.

Zhang Zhiyong, one of the country’s leading independent automobile market analysts, said: “Instead of resuming it back to 10 per cent, setting the tax rate at 7.5 per cent for next year will provide a cushion for a slowdown in car sales.

“The automobile market will therefore see a soft landing rather than a sharp decline in sales growth.”

Zhang expects car sales growth for next year to stay at about 8 to 10 per cent.

A gradual increase in the tax rate will minimise the impact on carmakers, dealers and also buyers, he added.