Between December 30-31, 2025, multiple naphtha suppliers across China reported receiving oral notifications from local tax authorities that, starting in 2026, China's domestic naphtha supplied via internal transfers, inter-group supply, and designated direct supply is expected to be subject to a unified consumption tax.
Naphtha used for ethylene and aromatics production is anticipated to follow the same "tax-first, refund-after" mechanism currently applied to imported naphtha.
(As of publication, formal written notices at the local level are still pending.)
Cost impact: net increase estimated at ~RMB 300/tonne
Under the existing tax framework of the State Taxation Administration, naphtha consumption tax stands at RMB 1.52/liter (approximately RMB 2,105/tonne).
Based on industry calculations, under a combined effect of:
- The tax-first, refund-after mechanism,
- Linkage with surcharges such as urban construction tax, and
- Lengthy refund cycles,
The net additional cost borne by chemical producers is estimated at around RMB 300/tonne (~ USD 40/tonne).
Importantly, this increase is not purely driven by the nominal tax rate. Instead, it reflects:
- Roughly RMB 200/tonne from tax-inclusive surcharges rising in tandem, and
- Approximately RMB 100/tonne from working-capital occupation and opportunity costs tied to refund delays.
- From both a policy logic and market reality perspective, the move points to three core objectives:
1 | Levelling the playing field
Aligning the tax treatment of China's domestic naphtha with imported naphtha, which already operates under a tax-first, refund-after regime, helps narrow structural distortions between integrated refining-chemical players (such as those in Huizhou) and foreign-funded or import-reliant producers, ensuring a more neutral competitive starting point.
2 | Securing fiscal revenues and closing grey channels
With expanding circulation volumes, some naphtha has reportedly flowed into non-cracking uses (e.g. blending or secondary trading) through nominal "designated supply" arrangements or accounting structures, eroding the tax base.
The unified tax approach signals a clear attempt to compress these grey areas.
3 | Accelerating capacity optimization
Given the high tax burden and refund cycles typically spanning 6-12 months, significantly longer than the 2-3 months commonly seen for imported naphtha, corporate cash costs and financing pressures are expected to rise in parallel.
Against the backdrop of sluggish chemical demand and limited cost pass-through, profitability is likely to be squeezed from both ends, strengthening market-driven exit pressure on outdated or inefficient capacity.
Key implications:
1) Immediate cost uplift: +~RMB 300/tonne (conservative estimate)
As a price-inclusive tax, the consumption levy raises not only the direct tax burden but also related surcharges. Combined with prolonged refund cycles, the overall net cost increase under the tax-first, refund-after framework is conservatively estimated at around RMB 300/tonne.
Final cost allocation will depend on buyer-seller negotiations and pricing power across the chain.
2) Further margin compression, forcing capacity rationalization
Since 2023, unit margins along the naphtha cracking chain have remained under sustained pressure. Additional tax costs are expected to deepen losses, potentially accelerating the exit of technically outdated or economically marginal units.
3) Reinforcing "less oil, more chemicals" and self-supply strategies
Over the longer term, the tax adjustment could incentivize integrated refiners to strengthen naphtha self-supply and internal consumption, optimizing cost structures.
Meanwhile, independent refiners and joint-venture chemical producers without refining support is expected to be forced to lower operating rates or recalibrate production strategies, reshaping local production capacity and supply-demand balances.
Compliance watch & market dynamics
Market sources indicate that major state-owned players are actively engaging with tax authorities, while short-term operational responses, such as adjustments to invoicing timelines, have already emerged.
Once formal policy documents are issued, implementation details and refund schedules will be critical in determining the ultimate cost burden and cash-flow impact across the industry.
Q&A
Q: How material is the impact?
A: Under the tax-first, refund-after framework, the net cost increase for chemical producers is estimated at around RMB 300/tonne, with the greatest pressure on low-value-added or loss-making units.
Q: What should companies prioritise now?
A: Immediate focus areas include:
- Reviewing direct supply and inter-group contracts,
- Ensuring invoice–usage consistency,
- Strengthening usage tracking and documentation,
- Assessing working-capital pressure, and
- Confirming refund timelines through direct communication with tax authorities.
The above reflects our initial assessment of the evolving policy framework. A more detailed breakdown of policy rationale, cost transmission, and industry implications will be covered in the final January issue of China (Energy Transition) Policy Perspective (produced by GL Consulting).
Click the hyperlinks for the full text or email glconsulting@mysteel.com.
