China will raise sales tax on small cars to 7.5%, a media report citing anonymous sources said, reeling in an incentive that has propped up the car industry, which is heading for its 26th consecutive annual expansion.

According to Bloomberg, the new tax rate is less than the 10% originally scheduled to take effect from January 2017 but is an increase from the 5% rate introduced in October 2015. Shares of carmakers fell.

"This is worse than the market's expectation of keeping the tax at 5%, so some people are disappointed," Ka Leong Lo, a Hong Kong-based analyst at Kim Eng Securities, told Bloomberg. "Some others simply use this as an excuse to reduce their exposure in the auto sector because they have made profits this year on auto stocks."

BAIC Motor and Geely Automobile Holdings each declined more than 4% on the news while Guangzhou Automobile Group dropped 3.2%. Great Wall Motor, China's largest SUV maker, fell 2.5%.

Bloomberg noted China's government halved the levy on purchases of vehicles with engines up to 1.6 litres last year after lobbying from the nation's auto association as demand waned along with the economy. Auto sales promptly rebounded and surpassed last year's tally in November, seeing a 26th consecutive annual gain.

Carmakers had lobbied for the lower levy to be made permanent, citing concerns sales would slump next year after consumers brought forward their purchases. The government cited the industry's status as a linchpin of the world's second-biggest economy when introducing the incentive last year.

Consumers bought 21.1m passenger vehicles in the first 11 months of the year, more than the 20.6m units purchased in all of 2015, according to the China Passenger Car Association. The last time China's car market shrank was 1990.

Sales growth may moderate to 3% in 2017 from about 15% this year, Lo said in a report cited by Bloomberg.

Geely posted the fastest sales growth among major local automakers with its deliveries almost doubling to 102,422 units in November, while Guangzhou Auto and Great Wall recorded sales increases of more than 30% last month, the report added.