Vivian Wai-yin Kwok, 08.14.08, 4:24 AM ET – Forbes
HONG KONG –
In an effort to clean up China’s dirty air, Beijing plans to discourage car purchasers who buy big vehicles, with engines above a three-liter capacity, by raising the consumption tax rate to as much as 40%.
Fans of large vehicles in China will need to write bigger checks for them because the Ministry of Finance announced Wednesday evening that, effective September 1, the consumption tax rate for passenger vehicles including cars, multipurpose vehicles and SUVs with engine sizes between three and four liters will be increased to 25%, from 15%. The tax rate for passenger vehicles with engine displacement exceeding four liters will be doubled, to 40%.
Further encouraging people to buy energy-efficient cars, the tax on small cars, with engine sizes at or below one liter, will be reduced to 1%, from 3%. The tax rate for cars with engine capacity between one and three liters will remain unchanged.
The new policy is consistent with China’s objectives of reducing energy usage and pollution.
China is one of the biggest and fastest-growing auto markets, with 4.1 million passenger cars sold in the first seven months in 2008, up 15% from the equivalent period last year, according to the China Association of Automobile Manufacturers. The central government has pledged to lower energy consumption per unit of GDP by 20% and to cut emissions of major pollutants by 10% during the 11th five-year plan (2006-10).
Previous efforts to cut emissions notwithstanding, China failed to meet its annual target of a 4% reduction, falling short by 0.34 percentage points. The tax measures announced Wednesday are also expected to have a minimal effect. “We expect limited impact on overall passenger vehicles and car sales growth in China given the relatively low market share of the affected engine sizes,” Gerwin Ho, an analyst with Citigroup, said.
According to Citigroup’s statistics, jumbo passenger vehicles with engines exceeding four liters accounted for only about 0.1% of total car sales in the first half of 2008. Passenger vehicles with engines displacing three to four liters contributed just 0.4% of total sales in the same period. “In addition we estimate the tax saving associated with lower consumption tax rate for passenger vehicles with engines at or below 1.0 liter to be minimal given their low selling price. We estimate, for example, that the tax saving for Chery’s QQ 0.8L to be about 2% of its retail price of 30,800 yuan [$4,489.7],” said Citigroup.