China’s ministry of finance last week announced plans to change consumption tax rates on cars to encourage consumer to purchase small-engine models. While the government’s aim was to encourage greater fuel efficiency as crude oil prices continued to soar, the new tax rates will inevitably penalise car importers.
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From 1 September, the consumption tax on passenger cars with engines larger than 4.1-litres will be raised from 20% to 40%, while the tax on models with engines ranging between 3.0-4.1-litres will increase from 15% to 25%. These latest increases follow earlier revisions implemented in March 2008 which lifted consumption tax on cars with engines larger than two litres to 20%, from 8%. This rate remains unchanged for 2.0-3.0-litre cars
Consumption tax on cars from September 2008
Engine Size (cc) | Consumption Tax (%) 
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up to 1000 | 1 |
1000 – 1500 | 3 |
1500 – 2000 | 8 |
2000 – 3000 | 20 |
3000 – 4100 | 25 |
over 4100 | 40 |
Source: Ministry of Finance.
For cars with engines of one litre and below – almost all of which are made domestically – the tax drops from 3% to 1%. Consumption tax on cars with engines of 1.0-1.5-litres was cut from 5% to 3% in March and remains unchanged . For 1.5-2.0-litre cars, the rate also remains unchanged at 8%.
Passenger cars with engines over 3-litres tend to be niche, low-volume luxury models – most of which imported from Europe and the USA. While the impact of the consumption tax increase on the overall market will be limited, it is expected to affect luxury car imports. Mercedes-Benz, BMW, Lexus and exotic sports car manufacturers such as Ferrari will be affected most.
Sales of imported cars rose by close to 25% to over 80,000 units in the first half of 2008, compared with almost 20% growth of the overall market, according to data released by China Association of Automobile Manufacturers.
Sales of imported cars with engines larger than three litres rose 54% to over 32,000 units during this period.
Tony Pugliese
