Adjusting and reforming China's automotive industry tax and fee system is urgently needed.

Translated from China Automotive News Network
Undoubtedly, taxation is a significant and complex issue, serving as a sensitive regulatory lever in a market economy. It touches upon the distribution of interests among various segments of society, helping to balance and harmonize relationships among stakeholders. Promoting reform of the industrial tax policy system holds profound implications for building a new development pattern characterized by domestic major circulation as the mainstay, with domestic and international circulations mutually reinforcing each other. Meanwhile, automotive taxation is an indispensable and crucial policy for guiding the healthy development of the auto industry. Any reforms or adjustments to the automotive tax and fee system will inevitably have a substantial impact on the sustainable growth of the automotive sector.
1. The "14th Five-Year" Plan Outline clearly outlines the requirements for tax and fee system reform.
The "14th Five-Year Plan for National Economic and Social Development of the People's Republic of China and the 2035 Vision Goals" clearly emphasizes the need to establish a modern fiscal, taxation, and financial system, thereby enhancing the fundamental and pivotal role of finance in national governance. It also calls for improving fiscal and tax systems that align with the demands of high-quality development, with a focus on supporting stable manufacturing sectors and strengthening industrial and supply chains. Additionally, the plan proposes adjusting and optimizing the scope and rates of consumption tax, while advancing the shift of tax collection points backward and steadily transferring authority to local governments.
2. The current tax and fee system for the automotive industry has considerable room for improvement.
The automotive industry is one of the key sources of national tax revenue. Looking at China's current tax system for the automotive sector, in addition to the consumption tax, various taxes and fees are involved at every stage—ranging from production and purchase to usage, ownership, and import/export activities. At present, China's automotive tax and fee structure is relatively comprehensive, playing a guiding, incentivizing, and moderately adjusting role in fostering the industry's development. However, implementation also reveals that there are still significant shortcomings in the current tax framework governing China's automotive sector.
1. The overall tax burden on automobiles is relatively high.
In China, the taxes directly paid on a car product—from production and sales to usage—include value-added tax, consumption tax, vehicle purchase tax, vehicle and vessel tax, and refined oil consumption tax. Indirectly paid taxes mainly consist of urban maintenance and construction tax, education surcharge, local education surcharge, property tax, urban land use tax, stamp duty, and corporate income tax, which are levied on enterprises involved in automobile manufacturing and sales. Additionally, imported complete vehicles and auto parts are subject to import tariffs.
Taking the purchase stage as an example, Chinese car owners pay at least 31% in taxes (including 13% value-added tax, 10% vehicle acquisition tax, 5% consumption tax, and others), whereas in the U.S., the tax rate is less than 10% (ranging from 2% to 8% sales tax). In Japan, it’s 7.5% (consisting of a 3% vehicle acquisition tax, plus additional fees like weight tax and automobile tax). On top of this, buyers in cities with vehicle purchase restrictions must also pay license fees—ranging from as little as 20,000 to 30,000 yuan up to 70,000 or 80,000 yuan in more expensive cases. Moreover, when purchasing imported vehicles, an additional 15% tariff is imposed. Overall, these high tax burdens significantly increase the financial strain on buyers, ultimately discouraging automobile consumption.
2. The tax burden structure is not entirely reasonable.
From the perspective of each tax collection stage, China's tax burden is relatively high during the vehicle purchase phase, lower during the usage phase, and lowest during the ownership phase—these three stages account for roughly 60%, 35%, and 5% of the total tax burden, respectively. In contrast, Japan’s tax burden distribution across the purchase, usage, and ownership phases of automobiles is approximately 19%, 52%, and 29%, respectively.
This tax structure results in two key outcomes: On one hand, because the tax burden is relatively high during the purchase phase, consumers experience greater psychological and financial strain. When faced with a one-time payment, they become highly sensitive to the upfront cost of acquiring a vehicle, which significantly dampens their willingness to buy cars—evidence of this can be seen in how several reductions in the vehicle acquisition tax have influenced sales trends for cars within specific displacement ranges. On the other hand, since taxation during the usage phase remains light, it encourages users to over-rely on their vehicles, exacerbating traffic congestion and further undermining efforts toward energy conservation and environmental protection.
3. The tax system is relatively crude.
In China, the main types of vehicle taxes—such as vehicle and vessel tax and consumption tax—are still levied based on a car's engine displacement tiers. Although the consumption tax applies different tax rates to passenger vehicles according to their displacement size, widening the tax gap between vehicles with varying displacements and increasing the tax burden on larger-displacement and high-energy-consumption models while easing it for smaller ones—it has yet to be directly linked to fuel efficiency. As a result, its effectiveness in promoting energy conservation and emission reduction remains limited.
In recent years, thanks to advancements in engine and transmission technologies, some cars—despite having larger engine displacements—have adopted innovations such as turbocharging and direct-injection systems, along with more energy-efficient advanced transmission technologies. As a result, their fuel consumption is now even lower than that of vehicles with smaller engine capacities. Therefore, using fuel efficiency rather than engine displacement as the basis for taxation is clearly a more scientific approach to promoting energy conservation and emission reduction.
3. The automotive tax and fee system needs to evolve with the times and embrace scientific development.
China's automotive tax system was essentially established in the 1980s and 1990s. Although it has undergone several adjustments in recent years, these changes have consistently been rooted in the perception of automobiles as luxury goods—clearly reflecting a tax policy that aimed, to a significant extent, at curbing consumer spending. However, times have changed, and under the new economic landscape, the existing auto tax framework can no longer effectively support the shift toward more sustainable growth models or help rebalance China's economic structure. Instead, there is an urgent need to actively expand domestic demand, boost auto consumption, and align tax policies with the broader goals of fostering national economic development.
4. Draw on the experiences of advanced countries and scientifically advance the reform of the automobile tax and fee system.
Compared to developed countries and regions such as Europe, the U.S., and Japan, China's automotive tax and fee system is relatively backward and has certain shortcomings, including missing tax categories, unreasonable tax and fee regulations, and insufficient utilization of taxation functions. These issues have largely become outdated—and in some cases, even hinder—China's automotive industry from achieving sustainable growth. To foster stable and healthy development of China's automotive sector and drive continuous expansion of the national economy, it is essential to reassess, from a strategic, top-level perspective, the significant impact of automotive tax and fee policies on both the automotive industry and the broader national economy. This includes proposing comprehensive solutions to refine China's automotive tax and fee policies, thereby paving the way for necessary adjustments and reforms in the automotive tax and fee system.
5 Suggestions for Reforming the Tax and Fee System in the Automotive Industry
1. Promote and expand automobile consumption by implementing reasonable and appropriate tax reductions.
Almost all countries impose taxes on automobiles, though the underlying motivations vary. Currently, China’s automotive tax system still primarily aims to curb car consumption. The existing tax framework remains centered on price and engine displacement as key indicators, with a focus on controlling purchasing behavior through taxation—and fiscal revenue generation serving as the main objective of these taxes. Although China has already become the world’s largest automotive consumer market, the development level of its automotive industry still needs improvement, and its international competitiveness remains relatively weak. Therefore, it is essential to further nurture and expand the domestic auto market in order to elevate the overall competitiveness of the automotive sector.
The primary goal of the automotive tax reform should be to boost domestic car consumption. Under the current circumstances, prioritizing the encouragement of domestic demand is especially crucial. Tax and fee reductions are a direct and highly effective way to stimulate auto purchases. Therefore, it remains essential to explore and implement policies that offer tax and fee exemptions as part of the automotive tax reform.
2. Guided by energy conservation, emission reduction, and low-carbon development, establish an automotive tax and fee system based on energy consumption or carbon reduction.
Currently, developed countries and regions such as the United States, Europe, and Japan have already incorporated fuel consumption or carbon emission reductions as the basis for taxing automobiles—either entirely or partially. Moreover, most EU member states link automobile taxes directly to CO2 emissions. In contrast, in China, the primary vehicle taxes—including vehicle and vessel tax and consumption tax—are still levied primarily based on a car’s engine displacement tiers. Yet, experience has shown that higher displacement does not necessarily equate to greater fuel consumption; displacement alone cannot accurately reflect a vehicle’s actual fuel efficiency.
Therefore, basing taxation on fuel consumption or carbon reduction rather than engine displacement is clearly more scientific in promoting energy conservation and emission reduction. Meanwhile, when introducing fuel consumption or energy-efficiency factors into vehicle-specific taxes, the purchase tax and consumption tax could be considered as suitable options.
3. Ensure total tax revenue and scientifically determine the tax allocation between the central and local governments.
China's current tax system originated from the tax-sharing reform initiated in 1994, which redefined the division of fiscal and administrative powers between the central and local governments—shifting more financial authority to the central level while delegating more responsibilities downward. This reform significantly strengthened the central government's capacity for macroeconomic regulation and control. It can be said that the tax-sharing reform effectively supported the development of China's market economy at the time and played a crucial role in managing the relationship between the central and local governments, as well as between the government and enterprises. However, with the continuous growth of China's economy and ongoing reforms in tax policies, the tax-sharing system has gradually given rise to certain challenges. For instance, the "business tax-to-VAT" reform implemented in recent years has turned value-added tax into a shared tax between the central and local governments. As a result, local governments have lost their primary tax source—business tax—leading to fiscal strains at the local level. Therefore, future tax reforms should aim to maintain the overall stability of the existing fiscal framework while carefully determining the allocation of taxes between the central and local governments. By stabilizing local governments' revenue expectations and ensuring they have access to steady and reliable financial resources, we can better enable them to deliver high-quality public services.
4. Adjust tax types, merge existing taxes, and establish a modern, new automotive tax system.
Establishing a modern, new-type automotive tax system requires a long-term perspective, continuously improving the automobile taxation framework, and fully leveraging the regulatory power of taxes. We must build a sound fiscal and tax system that supports scientific development, systematically reviewing China’s current vehicle-related tax categories. This includes conducting a rigorous, scientific analysis and evaluation of key taxes—covering vehicle acquisition, ownership, and usage—as well as assessing the corresponding tax burdens. Additionally, we should streamline or consolidate overlapping tax types, gradually creating a tax structure that encourages car consumption, promotes efficient use, and fosters energy conservation, emissions reduction, and the widespread adoption of new-energy vehicles. Ultimately, this will help shift the economic growth model from investment-driven to domestically demand-driven, while advancing sustainable development in both energy efficiency and industrial sectors.
5. The auto consumption tax faces the most prominent issues, and the industry is eagerly awaiting its swift adjustment.
Automobiles are major contributors to consumption tax revenue. As an excise tax embedded in the price, it is levied at the production stage—first paid by整车 manufacturers, which significantly ties up their working capital, thereby impacting their day-to-day operations to some extent. Meanwhile, consumers often lack a clear understanding of how much tax they’re ultimately bearing. To address these issues, it’s imperative to shift the tax collection point from the production stage to the consumption stage as soon as possible, transforming the tax from an "in-price" model to an "out-of-price" system. This change would directly reflect the intended purpose of the tax and help guide consumer behavior more effectively. Additionally, designating a portion of the consumption tax to be retained locally would enable regions to reap direct benefits from tax revenues. Such a measure could encourage local governments to pivot away from their traditional focus on investment at the expense of consumer spending, empowering them to boost investments in transportation infrastructure while simultaneously fostering and promoting automobile consumption across the board.
Gradually shifting the collection of consumption taxes to the wholesale or retail stages will enable businesses to better channel funds into technology and product innovation, help expand local revenue sources, and encourage regions to focus more on improving their business and consumer environments—ultimately boosting domestic demand growth.
Certainly, comprehensively reforming the current automotive tax and fee system is a significant undertaking that requires careful consideration tailored to China's national conditions, systematic and scientific analysis, as well as thorough research into the experiences of advanced countries. It also demands a gradual, yet proactive and steady approach. However, given the pressing and urgent circumstances, it is now more critical than ever to implement the strategy of expanding domestic demand, fully stimulate consumption, foster the sustainable growth of the automotive industry, and accelerate the reform and adjustment of the automotive industry's tax and fee framework.

Translated from Sina Auto

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