China’s Ministry of Finance, the State Administration of Taxation, and the Ministry of Industry and Information Technology have jointly announced the continuation of the vehicle purchase tax reduction and exemption policy for new energy vehicles, which include electric vehicles (EV), plug-in hybrids, and fuel cell vehicles, until the end of 2027.

The extension is expected to result in a ¥520 billion (~$72 billion) total purchase tax reduction and exemption.

According to the joint announcement by the three government departments, the new energy vehicle purchase tax reduction policy will encompass a four-year extension period, out of which, during the first two years, the vehicle purchase tax will be fully exempted, while in the subsequent two years, it will be halved.

The initiative aims to support the development of the new energy vehicle industry and can meet the rising demand for clean and green transportation in China.

China faced a slowdown in sales earlier this year after the government phased out the old tax credits that had been in place for around a decade. The policy change affected many new energy vehicle manufacturers who had relied on the subsidies to boost their sales and compete with traditional carmakers.

However, according to China media reports, the new energy vehicle market has shown signs of recovery in recent months, as manufacturers slashed prices to attract customers and cope with the lower subsidies. This has sparked a price war among new energy vehicle makers, who have sacrificed profits to gain market share.

According to industry reports, new energy vehicle sales increased in May 2023 compared to the same period last year.

The rebound is expected to continue as the government introduces a new subsidy program for new energy vehicles.

Fiscal and tax policies have proven to be instrumental in driving the growth of the new energy vehicle industry. Since September 1, 2014, the purchase of new energy vehicles in China has been exempt from vehicle purchase tax.

This policy has been extended three times, in 2017, 2020, and 2022, and was due to expire on December 31, 2023.

By the end of 2022, the cumulative tax exemption scale under this policy exceeded ¥200 billion (~$27.7 billion), with an estimated tax exemption amount exceeding ¥115 billion (~$15.9 billion) in 2023.

Xu Wen, a researcher at the Chinese Academy of Fiscal Sciences, emphasized that the continuation and optimization of the new energy vehicle purchase tax reduction policy will stabilize market expectations, enhance the consumption environment, unleash the consumption potential of new energy vehicles, and stimulate effective demand.

The reduction and exemption levels will gradually decrease over the years. Xu Wen emphasized that the new energy automobile industry cannot solely rely on financial subsidies and tax incentives for growth.

The number of EVs globally is set to exceed 100 million by 2026 and reach 700 million by 2040, according to the latest report by BloombergNEF (BNEF). These estimates represent a significant surge from the 27 million EVs registered at the beginning of this year.