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The effectiveness of China’s new vehicle excise tax

According to the latest statistics from the customs, China’s import of large-displacement automobiles, especially those powered by 4.0 liter and larger engines, declined dramatically in the past couple of months.



Such a change has come about since China’s new vehicle excise tax came into effect on September 1, which raised the tax for vehicles with engines of 3.0-4.0 liters from 15 to 25 percent and for vehicles with engines of 4.0 liter and higher from 20 to 40 percent.



As a result, estimated increase in the cost of imports of 3.0L-4.0L vehicles has gone up by 13 percent and those of 4.0L and higher 33 percent.



At Shenzhen, one of China’s five authorized ports for imported automobiles, the number of vehicles of displacement of 3.0 liter and higher which arrived in September declined by 46 percent. In comparison, China imported 90,000 automobiles with engines of 3.0L and higher in the first half of 2008, accounting for 43 percent of the country’s total imports. Last years, total imports of SUVs were 142,200 units, or 65 percent up from a year before.



According to the China Center for the Import of Automobiles, the ratio between the imported 3.6L and 4.2L Touareg SUVs from Volkswagen has changed to 20:1 now compared to last year’s 2:8.



Judging by these numbers, China’s new excise tax has effectively reduced demand for the imports of large-displacement vehicles, especially gas-guzzling SUVs. The decline in such imports, however, has been contributed by another very important factor: government contraction in spending on automobiles and large-displacement SUVs in the wake of the unprecedented earthquake disaster in central Sichuan earlier this year.



The new higher excise tax on large-displacement vehicles may not have too much of an impact on the behavior of private individuals, especially those newly rich, who can afford luxury cars priced in the hundreds of thousands of dollars. China’s new excise tax is only a move to the right direction in trying to influence consumer behavior towards energy conservation and environment protection. More effective measures, such as the much discussed fuel tax or maybe a luxury tax, should be in place to make the new excise tax work even more effectively.



Take small-displacement vehicles for example. The reduced excise tax from 3 to 1 percent on sub-compacts powered by a 1.0L or smaller engines has failed to drive up market demand because of the absence of a fuel tax incentive.

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