China to raise car tax to 20%, overhaul luxury levies

March 22 | Updated: Mar 23 2006, 05:30am hrs
China raised taxes on larger cars to 20% and imposed levies on luxury goods such as yachts, a week after Premier Wen Jiabao pledged to increase energy efficiency and close a widening income gap.

The tax on automobiles with engine capacity larger than 2 liters will be raised from 8% from April 1, the Ministry of Finance said on its Web site. Yachts, golf clubs and expensive watches will be subject to consumption tax for the first time.

Economic growth that averaged 9.7% a year since 1978 has created an estimated 300,000 US-dollar millionaires in China, spurring demand for designer brands and high-end cars such as General Motors Corp.s Cadillac. It has also strained energy and land resources and worsened pollution, leading to 87,000 cases of protests last year by farmers and workers.

This is part of the governments strategy of rebalancing growth and reducing energy demand, said Ben Simpfendorfer, China Strategist at the Royal Bank of Scotland in Hong Kong.

The government wants to show its doing something to increase the tax burden on the rich to reduce the widening disparity between the rich and poor.China plans to boost spending on agriculture, rural education and health care to help close the income gap, Premier Wen said at the end of the annual session of parliament on March 14. He pledged to tackle pollution and improve energy efficiency.

GMs Hummer

The government wants to deter people from buying gasoline guzzlers like General Motors Corp.s 6-liter Hummer H2 truck, whose catalog price of 1.08 million yuan ($134,530) is equivalent to what the average Chinese worker earns in 80 years, based on Chinas 2005 per capita income of $1,700.

Higher taxes will raise the prices of sedans including GMs 3.6-liter Buick Royaum, Bayerische Motoren Werke AGs 2.5-liter 325i and Ford Motor Co.s 2.5-liter Mondeo.

The change will force carmakers to produce smaller cars in future, said Wang Zhihui, an automobile analyst at Shenyin Wanguo Research & Consulting Co. in Shanghai. Manufacturers will have to raise car prices to cover the increase in taxes.

Rising income in cities including Beijing and Shanghai have spurred sales of cars, vans and trucks, turning China into the worlds third-largest vehicle market after the US and Japan.

Vehicle ownership by individuals more than doubled to 13.65 million units in 2004 from 6.25 million in 2000, according to the China Council for the Promotion of International Trade. As many as 5.76 million new cars, trucks and commercial vehicles were sold last year in China, 14% more than in 2004.

It was a matter of time before the tax was raised, said Kenneth Hsu, Fords vice president of public affairs, in a phone interview. The price of Fords Mondeo sedans will be affected by the tax, he said, without elaborating.

Even as Chinas economy grew 9.9% last year to overtake the UK as the worlds fourth largest, an estimated 200 million people lived on less than $1 a day. China had 87,000 protests last year, or more than 200 incidents every day around the country, according to the Ministry of Public Security. The number rose from 74,000 in 2004 and 10,000 cases in 1994.

Higher taxes on automobiles hurt the assemblers of sports-utility vehicles such as Great Wall Motor Co., the countrys largest SUV maker. Great Wall Motors shares fell 3.8% to HK$4.45 in Hong Kong today, the biggest one-day percentage fall in nearly six weeks.

Bloomberg