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

Maintaining consumption tax only on gasoline-powered vehicles over the long term would weaken its regulatory function, undermine the stability of the revenue base, and create unequal policy expectations for the two types of vehicles, according to a recent article published in International Taxation, a journal overseen 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 grown into the world’s largest, with electric and hybrid vehicles accounting for 54 percent of retail passenger car sales last year and 63 percent last month, 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 the Chinese mainland’s CNY2.3 trillion (USD339.9 billion) NEV consumer market last year, the authors said.

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 the tax breaks. Beginning this year, the country replaced full exemption from the vehicle purchase tax for NEVs with a 50 percent reduction on the statutory rate. The tax will return to the full 10 percent rate 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 the incentive for local authorities to promote consumption.

Editors: Dou Shicong, Emmi Laine