(Yicai) July 16 -- Chinese tax experts have proposed extending the country's consumption tax to all new energy vehicles, arguing that the sector's rapid growth has reduced the need for preferential tax treatment and that the move would help create a more level playing field between fuel-powered vehicles and NEVs.

Maintaining a consumption tax only on fuel-powered vehicles over the long term would weaken the tax's regulatory role, undermine the stability of tax revenue, and create unequal policy expectations between the two types of vehicles, according to an article published recently in International Taxation, a magazine backed by the State Taxation Administration. The article was co-authored by Liu Yi, a professor at Peking University's School of Economics, and other researchers.

The proposal comes as China's NEV market has become the world's largest, with retail penetration reaching 54 percent last year and 63 percent in June, exceeding 60 percent for the third consecutive month, according to the China Passenger Car Association.

If China levied a 5 percent consumption tax on all NEVs, it could generate about CNY117.3 billion (USD16.4 billion) in additional tax revenue based on CNY2.3 trillion (USD339.9 billion) in NEV consumption in the Chinese mainland in 2024, the authors said.

Tax Incentives Face Rollback

China has long offered tax incentives to support the development of its NEV industry. Under the current tax system, buyers of fuel-powered vehicles pay a consumption tax ranging from 1 percent to 40 percent, while only ultra-luxury NEVs priced above CNY900,000 (USD133,000) are subject to a 10 percent consumption tax.

As the industry has matured, however, China has begun scaling back preferential tax policies. Beginning this year, the country replaced its full exemption from the vehicle purchase tax for NEVs with a 50 percent reduction from the statutory rate. The tax will return to the full statutory rate of 10 percent in 2028.

The article said a phased approach is appropriate because China's NEV industry is still developing. A gradual expansion of the consumption tax to cover NEVs, combined with an adequate transition period, would help minimize disruption while ensuring the reform is implemented smoothly.

Unlike the existing consumption tax, which is entirely retained by the central government, revenue collected from NEVs could be allocated to local governments, the authors suggested. Doing so would strengthen local fiscal resources and increase local governments' incentives to promote consumption.

Editors: Dou Shicong, Emmi Laine