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Beijing's decision to maintain tax on auto sales is a bad move
Yang Jian | 2018/11/16

SHANGHAI -- The National Development and Reform Commission, China¡¯s central economic planning agency, said Thursday the government has no plan to cut the tax on new-vehicle purchases as was widely expected.

The decision is irrational. 

Given the severe challenges confronting the Chinese economy, including slowing demand for new cars and light trucks, the government should reduce the tax as soon as possible, rather than sit idle and do nothing.

U.S. tariffs, along with deep-rooted internal problems such as debt-laden state-owned enterprises and unfavorable policy treatment of private businesses, has weakened the Chinese economy. 

In the third quarter, economic growth across China slowed to 6.5 percent from 6.8 percent in the first half. 

Amid the slowing domestic economy, China¡¯s new light-vehicle deliveries dropped for the fourth straight month, slumping 13 percent year on year to below 2.05 million in October.

Why has the car market slowed considerably in an economy that is still growing? 

It has much to do with the high costs of car purchases and ownership in China.

When buying new cars, Chinese consumers must pay a value-added tax and a consumption tax, the same taxes they pay for other goods. They also have to pay custom duties when buying imported vehicles.

That¡¯s fair enough. But they must also pay a tax that is specifically levied on vehicle purchases. The tax on a new vehicle stands at 10 percent of the price. 

In addition, buyers also pay an annual property tax for car ownership, which varies from 180 yuan ($26) to 4,500 yuan, depending on the size of the vehicle¡¯s engine.

But those are not the only expenses tied to car ownership. 

Most car owners in Chinese cities live in apartment buildings and do not have private parking lots. So they also have to pay parking fees that can run several thousand yuan a year, in addition to regular outlays for gasoline, maintenance and insurance.

All these constitute a sizable portion of expenditures for average car-owning Chinese families.

With the national economy rapidly losing steam, Chinese consumers are scrambling to cut discretionary spending. Because of high associated costs, a new car is more likely than other items to be removed from a consumer's shopping list.

With the Trump administration slapping punitive tariffs on a sweeping range of Chinese goods, Beijing is now seeking to reinvigorate the national economy by boosting domestic consumption. 

For that purpose, it will lower personal income tax starting at the beginning of next year.

In fact, the Chinese government slashed the vehicle purchase tax in the past whenever demand in the domestic car market showed signs of slight weakening -- it halved the tax for engine displacements of up to 1.6 liters in 2009 and 2016.

It is perplexing to see the government keep the vehicle purchase tax intact when the downturn of the domestic light-vehicle market has accelerated at a speed never seen before. 

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