China increasing sales tax on small cars in 2011

When the Chinese economy took a dive in 2009, the government cut the sales tax rate on cars with engines measuring 1.6L or smaller to just 5% but starting in 2011 the tax rate returns to 10%.

The Chinese Ministry of Finance announced today that economy is growing rapidly and that the initial tax cut was decided upon to help spur car sales, while also promoting smaller, more fuel efficient models. The tax was raised from 5% in 2009 to 7.5% in 2010 and with their tax rate needs to be altered as the “financial crisis;” has ended.

Since making this tax rate cut in 2009, Chinese auto sales boomed in the last two years making China’s auto industry a key target for automakers around the world. In 2009, China surpassed the United States for the most new vehicles sold with 13.65 million and through November 2010, there had been 16.4 million vehicles sold with enough autos sold in the last month of the year to put the country over the 18 million unit mark. With this massive growth in sales, General Motors and Ford Motor Company have been hard at work leveraging deals with other automakers around the world to gain more access to the Chinese market.

Through the first 11 months of 2010, the Chinese government has collected 23.8 billion dollars (American) – up 53% from 2009. This number looks good on paper but when you consider the fact that the tax rate went up from 5% in 2009 to 7.5% in 2010 (50%), there was only an actual improvement of roughly 3% but growth of 3% is better than no growth at all. Provided that the Chinese market continues at a similar pace as far as new car sales, the government can expect to bring in almost $36 billion USD in 2011.

The question, how much will this gradual increase in the tax rate impact car sales in the Chinese market?

Source: Xinhuanet