CHINA has announced plans to raise sales tax on big cars and cut rates on small vehicles from September, using a carrot-and-stick approach to help save energy and ease environment concerns.

However, the minor adjustment on the rate for small cars, along with an already weak market demand, left many analysts arguing it would have little impact to actually accelerate the development of small cars and change the overall auto consumption structure which the government is hoping for.

According to the new rate starting from September 1, the sales tax for passenger cars with engine capacity between 3 liters and 4 liters will rise to 25 percent from 15 percent and cars with 4-liter engines and above will attract a doubling in tax rate of 40 percent.

Meanwhile, the rate for cars with engines that are 1 liter or less will be cut from 3 percent to 1 percent.

After the Ministry of Finance released the tax adjustment last week, several car makers were quick to announce they would launch small-engine models while buyers rushed to buy powerful luxury models to beat the deadline to avoid paying the higher rates.

But a report from Guosen Securities pointed out that even if the rate on small cars is cut, it will have a limited impact on boosting sales, contrary to the government's purpose of spurring the sales of energy-efficient cars and restrain the purchases of gas-guzzling vehicles.

Most of the car makers will pass the price discount to consumers in an attempt to enhance price competitiveness to lure buyers. That means if the average price of small cars is between 30,000 yuan (US$4,364) and 50,000 yuan, the 2-percentage tax rate cut could lead to savings of several hundred yuan.






But Zhao Xuegui, an analyst at Guosen, believed that 'lower prices seem to be a less propelling reason to boost the sales for small cars'' because of the weak demand in the industry. He added that the small car segment is becoming a niche market in China, which shrugged off the policy effectiveness.

This round of tax adjustment is the second of its kind in the auto tax scheme since 2006. It is aimed at the smallest and biggest cars, while the mainstream market segment of cars powered by 1.4-liter to 2.5-liter engines was unchanged.

The small car segment in China has been suffering weak demand compared with sizzling sales growth for big cars, usually favored by Chinese auto buyers as a way to flaunt their wealth.

Sales of cars with engines less than 1 liter tumbled 31 percent to 251,700 units last year, according to the China Association of Automobile Manufacturers. Meanwhile, sales of sport utility vehicles surged 42 percent.

The market share of vehicles with engine capacity below 1.0 liter dropped from 6.5 percent to 3.1 percent last year compared with a 15-percentage-point jump for economy cars which are powered by engines ranging between 1.0 and 1.5 liters.

However, record high oil prices and rising operation costs paved the way for a heavy focus on fuel-efficient cars among consumers, who began to downsize.

China, the world's second largest auto market, is also encouraging the development and use of small vehicles when the industry became a major energy consumer and was one of the causes of air pollution.

'The change in sales tax could be regarded as a signal by the government, but it is far from enough,' said Xiang Hansong, an auto marketing expert.

'A lot needs to be done to offer more favorable policies to prompt car makers to develop advanced technology and turn around the old perception regarding small cars,' he added.

He is echoed by Wang Ziliang, vice president of Geely Automobile Holdings Group.






'The new tax definitely is encouraging for small cars but it will be hard to drive up sales. The market environment is creating high pressure on car makers and this somehow shrug off the benefits (of the tax),' Wang noted.

Shang Yugui, a spokesman for Great Wall Motor Corp, said the adjusted sales tax will help China's self-owned car makers become more competitive.

'Most of the big vehicles are made by joint ventures,' he told Shanghai Daily, 'With consumers becoming matured, small cars will receive more acceptance in the market.'

Great Wall, based in Baoding, Hebei Province, which switched to making passenger cars from its core SUV business, is developing a 1.0-liter subcompact car to meet possible market demand.

BYD Automobile Co Ltd, a leading maker of electric cars, is also expected to launch a new model, F0, which is powered by a 1.0-liter engine.

'In order to encourage the use of small cars, China should also introduce the fuel tax as soon as possible and offer more supportive policies throughout such as in cheaper parking fees and toll fees,' said Zhong Shi, an independent auto analyst.

For example, Japan nearly cut the purchase tax by 50 percent on small cars compared with big vehicles.