China's Ministry of Finance confirmed that it will end a tax break for purchases of smaller cars that has helped to drive auto sales in the last two years.
The ministry said Tuesday that the purchase tax for passenger cars with engines of 1.6 liters or less will return to 10% from Jan. 1., ending a preferential rate of 7.5% in place this year. The rate had already been raised from a special rate of 5% the government implemented for smaller car purchases in January 2009.
The National Development and Reform Commission, China's main economic planning agency, said on Dec. 9 that the 7.5% tax break would expire at the end of this year.
Expectations of the tax change are one factor that caused analysts and industry executives to predict that sales growth in China, the world's biggest car market, will likely slow in 2011 to around 10%, from around 30% this year.
The Beijing municipal government also said this month that it will issue up to 240,000 license plates for new cars next year--only about a third of the 750,000 vehicles that analysts estimate will be sold in the city of nearly 20 million people this year. The measure is a bid to ease the increasing traffic congestion in the capital,
The ministry's latest statement, issued jointly with the Administration of Taxation, didn't mention whether China will also scrap a cash subsidy of 3,000 yuan (about $450) a car for purchases of certain fuel-efficient vehicles with 1.6-liter or smaller engines.
China started subsidizing small-car purchases in 2009 to reverse a plunge in vehicle sales and encourage a reduction in fuel emissions.
Expectations of the tax incentive's impending end, coupled with the Beijing municipal government's reduction in new license plate issuance next year to curb traffic, have led many car buyers to move their purchases forward. Though sales figures for December haven't been released yet, local media have reported a surge in auto sales during the month.