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Customer LoginsChina's tax on small-engine cars to be raised to 7.5% in 2017
China is introducing a tapered tax cut for locally produced small-engine vehicles, following the expiry of the 50% cut for vehicles with 1.6-litre and smaller engines.
IHS Markit Perspective
- Significance: From 1 January 2017, the Chinese authorities will introduce a tapered tax cut for locally produced vehicles with 1.6-litre engines or smaller, raising the tax to 7.5%, but this still will be lower than the 10% charged on vehicles with engine sizes of over 1.6 litres.
- Implications: The new tax cut is still a discount and therefore will have a certain pull forward effect for consumers wishing to purchase vehicles, before the current tax cut's expiry due on 31 December.
- Outlook: IHS Automotive's light-vehicle sales forecasts estimate that, without any incentive, the market will dip into negative territory in 2017, but with the tapered 7.5% tax for small-engine vehicles, the light-vehicle market will respond with a 1% rise in sales in 2017.
The Chinese government plans to increase the current tax on small-engine vehicles produced in China, but this will still keep the tax lower than that on vehicles with larger engines.
According to a report from Bloomberg, the Chinese government will introduce the new tax rate on locally produced vehicles fitted with engines of 1.6 litres and smaller on 1 January 2017. The new tax rate of 7.5% of the selling price for small-engine vehicles is still lower than the 10% charged for vehicles with engines larger than 1.6 litres.
From 1 October 2015, the government implemented a 'quick fix' policy whereby small-engine vehicles produced in China would be taxed at just 5%, down from 10% previously. This 50% cut in the tax for locally built vehicles with engines of 1.6 litres and smaller boosted the industry and brought strong sales growth in the market. The policy was scheduled to expire on 31 December 2016. Now, the government is reported to be bringing in the new raised tax rate of 7.5% for locally produced small-engine vehicles, effective from 1 January 2017.
Outlook and implications
China's sales of vehicles with engines of 1.6 litres or smaller have surged since the tax cut policy was introduced on 1 October 2015. The sales volume of small-engine cars now accounts for over 70% of the passenger vehicle market in China. The big question is whether the new raised tax rate for small-engine vehicles will still keep the positive momentum in the market, as the rate will still be lower than the full tax rate of 10% currently levied on vehicles with engines over 1.6 litres.
IHS Automotive's light-vehicle sales forecast currently indicates that the new 7.5% tax rate will help lift overall volume sales in the market into positive territory in 2017. Had the tax rate cut expired completely, as was the government's policy, with a 10% tax rate being charged on all vehicles, our forecasts estimated that light-vehicle sales growth in China would dip into negative territory in 2017.
With the staged removal of the tax cut for small-engine vehicles through a new 7.5% rate to be effective until 31 December 2017, rather than the full 10%, the market is expected to witness a certain level of growth next year. IHS Automotive's initial assessment is that the light-vehicle market will grow 1% in 2017.
IHS Automotive light-vehicle sales forecasts for growth in China in 2016 continue to point towards a positive year-end, with annual sales expected to rise now by 12.5 % year on year (y/y), up from just 6.2% y/y in our original forecast and 9.2% y/y in our last update.
Passenger vehicle (PV) sales in China have grown faster than anticipated this year, and IHS Automotive forecasts have been updated to show a 16.4% y/y growth rate for the segment. Overall, PV sales this year are forecast to hit 22.9 million units in China.
As it stands, the 50% tax cut in the new-car purchase tax for locally produced models with 1.6-litre or smaller engines is to expire on 31 December this year, but credible reports have now emerged that there will a staged removal of the tax cut, with a 7.5% tax rate to be introduced during 2017. Without such an incentive, we forecast that light-vehicle sales in 2017 will remain flat and will probably experience a year-on-year decline. Our forecast team states, "The high base in 2016 could cause pressure on 2017 growth. The tax cut policy has brought forward quite a few vehicle sales in 2017 to 2016."
However, the government and regulatory authorities are seemingly increasingly nervous of the potential drop in the automotive market, which is considered a pillar industry in China. Consequently, it is now anticipated that the government will indeed extend the purchase tax cut for locally produced small-engine vehicles. Yet, the current policy is still due to come to an end on 31 December and any extension is likely to be officially announced only at the very last moment.
"Until now, there's no official statement of the incentive policy's extension. Under such circumstances, we are expecting a very low or even negative year-on-year growth in 2017," IHS Automotive's light-vehicle sales forecast analysis team states.
China's Ministry of Industry and Information Technology has officially stated that an extension of the tax cut is under discussion, while the China Association of Automotive Manufacturers' deputy general secretary believes that chances of an extension are "very high".
Without any subsidy in 2017, we forecast that China's light-vehicle market sales will decline 1.8% y/y to 27 million units next year. However, with the staged removal of the subsidy through the 7.5% rate, the light-vehicle market will rise by 1% in 2017, our forecast analyst team estimates.
About this article
The above article is from IHS Automotive Same-Day Analysis of automotive news, events and trends, and is a deliverable of the World Markets Automotive Service. The service averages thirty stories per day and also provides competitor and country intelligence. Get a free trial.