Since China announced to extend the purchase tax break for new energy vehicles (NEVs) in June (please refer to our previous reporting for details, link is shown below), it is widely concerned as to what extend could such package unleash the market demand. Mysteel will try to offer some clues via a quantitative approach.
The total tax credit is expected to amount to Yuan 115 billion and Yuan 150 billion in 2023 and 2024 respectively, before peaking at Yuan 195 billion in 2025. The amount will then fall gradually to Yuan 117 billion and Yuan 137 billion in 2026 and 2027 respectively after the credit ceiling per vehicle is halved. China's tax credit has experienced a drastic surge from Yuan 3.2 billion in 2016 to Yuan 12.6 billion in 2018, and then posted a year-on-year leap of 149% and 120% respectively at Yuan 39.9 billion and Yuan 87.9 billion in 2021 and 2022 respectively.
Table 1-1. NEV tax credit (Yuan billion)
Sources: China Passenger Car Association (CPCA), Ministry of Finance
The calculation is based on Mysteel's estimate that China's penetration rate of NEVs could reach 28% in 2023, 34% in 2024%, 40% in 2025, 45% in 2026 before NEVs take roughly half (49%) of the entire vehicle market by 2027 when the current tax break expires, which is projected to have a greater boost to NEV sales than the previous NEV subsidies, as the purchase prices are directly reduced.
One important change to the current tax break package is that all types of NEVs could enjoy the credit, regardless of the energy type, purchase price, etc. Therefore, when it is stipulated that the purchase tax exemption amount per vehicle shall not exceed Yuan 30,000, it means that the purchase price will be Yuan 351,000 the highest (purchase tax per vehicle = purchase price/1.17 (VAT=17%) * 10%) if it is to enjoy full tax exemption amount.
Specially, for high-end NEVs that are usually priced over Yuan 300,000, the tax exemption amount could be as much as Yuan 30,000 provided that the purchase price is no higher than Yuan 351,000. For example, a Yuan-400,000 NEV entails an actual purchase tax of Yuan 4,188 after counting in the tax break. As most high-end NEVs are SUVs with comparatively high energy consumption, PHEVs (Plug-in hybrid electric vehicles) will benefit more from the package than BEVs (battery electric vehicles) considering the long-range travelling in real scenarios.
For NEVs priced below Yuan 300,000, PHEVs will outperform fuel vehicles as well thanks to the tax credit. When comparing the cost of fuel vehicles and PHEVs based on a cycle of six years with 10,000-km mileage per year, PHEVs will cost 10 kWh more or some Yuan 10,000 more in cost than fuel vehicles after taking in the oil prices, power prices, maintenance expenses, taxes, insurance, and depreciation, and the surplus amount could be fully covered by the tax credit if the PHEV is priced at around Yuan 150,000. In other words, PHEVs with a price of Yuan 100,000-150,000 are with greater potential especially when NEVs could be granted with a green plate.
It can be seen from the table below that the market share of high-end NEVs has been growing and is expected to be further promoted by the existing tax break. And the product itself will play a more important part in grabbing the market share after NEV subsidies fully expire in 2022.
Figure 1-1. Market share of NEVs by price range
Source: Mysteel
Written by Aggie Hu, huchenying@mysteel.com
China's extended tax break for NEV purchase likely to boost vehicle sales
