Tax break extension for NEVs expected to boost consumer demand

China's latest policy measures to extend purchase tax breaks on new energy vehicles until the end of 2027 are expected to further stimulate consumer buying sentiment for NEVs and inject strong impetus into the world's biggest auto market, industry experts said.

The NEVs bought in 2024 and 2025 will be exempted from purchase tax amounting to as much as 30,000 yuan ($4,175) per passenger vehicle, according to a statement issued on Wednesday by the Ministry of Finance, the State Taxation Administration and the Ministry of Industry and Information Technology.

The tax on NEVs purchased in 2026 and 2027 will be halved, and each passenger vehicle bought will receive up to 15,000 yuan of tax exemption, the statement said. The tax incentive covers pure electric vehicles, plug-in hybrid electric vehicles and fuel-cell vehicles.

Preliminary estimates indicate that the last extension will result in a total of 520 billion yuan of tax exemptions and reductions, said Xu Hongcai, vice-minister of finance, at a news conference in Beijing on Wednesday.

Before the policy extension, the current exemption of purchase taxes on NEVs was scheduled to expire by the end of this year. The country first began exempting NEVs from purchase taxes in 2014, and this is the fourth time that the tax-exemption policy has been extended.

Cui Dongshu, secretary-general of the China Passenger Car Association, said that extending the policy of NEV purchase tax exemption is expected to waive 200 billion yuan in taxes by 2025, and such a stimulus policy will play a crucial role in bolstering the development of the NEV industry in the long run.

Cui said the sales of NEVs are expected to reach 8.5 million units this year, accounting for 36 percent of total vehicle sales in the country, while estimating that the NEV market will gain growth momentum next year.

"The competition in the plug-in hybrid EV segment will also become more intense in 2024," Cui added.

Zhang Xiang, a researcher at the Jiangxi New Energy Technology Institute, said, "The extension of preferential purchase tax policy for NEVs will further stimulate people's willingness to spend on NEVs, unleash consumption potential and give a big boost to the development of the NEV industry."

Chinese NEV manufacturers should invest more in the research and development of NEVs, accelerate technological innovation and roll out new models of vehicles, Zhang said. "The sales of NEVs are mainly focused on the first- and second-tier cities, but there is immense growth potential in lower-tier cities, townships and rural areas for NEVs."

More efforts are needed to speed up the layout and construction of public charging infrastructure, especially in rural areas, and the recycling of power batteries, in order to support the development of NEVs and satisfy people's charging demands, Zhang added.

China's NEV segment has witnessed rapid growth this year. Sales of NEVs in the country expanded 60.2 percent year-on-year to 717,000 units in May, data from the China Association of Automobile Manufacturers showed.

In the first five months of the year, NEV sales increased 46.8 percent from a year ago to 2.94million units, and NEV output totaled over 3 million units during this period, increasing 45.1 percent year-on-year, the CAAM said.

Li Xiang, founder and chairman of Chinese electric vehicle startup Li Auto, welcomed the four-year stable policy for NEVs and reiterated the company's ambitious goals in a post on Sina Weibo, China's Twitter-like platform. Li Auto aims to sell 1.6 million vehicles by 2025, with its revenue reaching 500 billion yuan, he added.

Nio, another EV startup, said consumers will enjoy the more favorable purchase tax policy and save more when buying a pure EV, compared with premium fuel-powered vehicles, adding that the move will shore up demand for automobiles.