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China Extends Tax Cut for Small-engine Cars

The Ministry of Finance and State Administration of Taxation have announced that the purchase tax on passenger cars with engines smaller than 1.6 litres will be levied at 7.5% from 1 January to 31 December 2017. According to the circular jointly issued by the two ministries, the normal tax rate of 10% will resume on 1 January 2018.

Thanks to purchase tax incentives, car sales in China this year have posted robust growth. According to the China Association of Automobile Manufacturers (CAAM), car sales were up by 14.11% year-on-year to 24.948 million units in the first 11 months of this year, far exceeding CAAM’s projections – both in terms of sales volume and growth rate -- at the beginning of the year.

The extended tax cut is set to influence the trend of car sales in China next year.

The prevailing 50% tax cut (from 10% to 5%) is believed to have attracted some consumers to make car purchases in advance. Many car dealers are said to be running out of stock, with customers agreeing to take delivery of their purchased models at a later date.  

Car sales are projected to increase by 13.9% in 2016. Given the unremarkable performance of the economy and the slower growth of the manufacturing sector, industry sources reckon the better-than-expected car sales this year are attributable to the tax break.

As the new car-purchase tax rate (of 7.5%) represents a smaller reduction on the normal rate, it is expected to have a certain effect on car sales in 2017.

According to CAAM’s earlier projections for 2017, sales of cars with engines smaller than 1.6 litres would go up by 6% year-on-year to 29.68 million units if the purchase tax rate stays at 5%; otherwise, the comparable figures would be 2% year-on-year increase to 28.56 million units.

As it turned out, the Government has decided to extend the tax break at 7.5%. The growth forecast for car sales in 2017 is therefore now revised to 4%-5%.

Content provided by Picture: HKTDC Research
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