The country’s top tax specialists have recommended broadening the scope of the consumption tax to include all new energy vehicles (NEVs). They argue that the rapid expansion of the NEV sector has diminished the necessity for special tax breaks and that this change could promote fair competition between traditional fuel-powered cars and electric models.
Long-term continuation of a consumption tax solely on fuel-powered vehicles risks weakening the policy’s regulatory function, destabilizing tax revenue streams, and creating unequal expectations among consumers and producers of different vehicle types. This perspective was detailed in a recent publication focused on international taxation, authored by a professor from a leading university’s economics school along with other researchers.
This proposal coincides with China’s NEV market becoming the largest globally, with retail penetration hitting 54% last year and climbing to 63% in June—maintaining a steady dominance for three consecutive months, according to industry data.
If a 5% consumption tax were applied to all NEVs, government revenue could potentially grow by around 117.3 billion yuan, or roughly $16.4 billion, based on projected NEV sales valued at 2.3 trillion yuan, or about $340 billion, in 2024.
Historically, China has supported its NEV industry through various tax incentives. Currently, consumers purchasing fuel-powered cars face a consumption tax ranging from 1% to 40%, whereas only ultra-luxury NEVs priced above 900,000 yuan (approximately $133,000) are taxed at a flat rate of 10%.
However, as the industry matures, the government has begun scaling back these incentives. Starting this year, the full exemption from vehicle purchase tax was replaced with a 50% reduction from the standard rate, and the full rate of 10% is scheduled to be reinstated in 2028.
Experts believe a phased approach is appropriate given the still-developing nature of the NEV market. Gradually expanding the consumption tax to include NEVs, combined with a transition period, would help minimize market disruptions and ensure smooth implementation.
Unlike the current system where all consumption tax revenue goes directly to the central government, the funds collected from NEVs could be shared with local authorities. This redistribution would bolster local fiscal capabilities and incentivize regional governments to actively promote vehicle consumption.