China Imposes Consumption Tax on Large Cars, Environmentally Un-sound Goods

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Starting April 1, Chinese consumers who buy cars with engine capacities of more than four liters will be required to pay a consumption tax of 20 percent, according to a joint notice issued by the Ministry of Finance and the State Administration of Taxation on March 21. The measure puts a higher tax burden on larger, energy-inefficient vehicles and reflects the government's recent embrace of a "small car policy."

Under the revised tax policy, the rate for small cars with a capacity of 1.0 to 1.5 liters will decrease to 3 percent, two percentage points lower than before. Cars of 1.5 to 2.0 liters will continue to enjoy a tax rate of 5 percent, and rates for cars of more than two liters will range from 9–20 percent.

To encourage more-efficient resource use and the development of a so-called "circular" economy, the revised consumption tax also covers certain items made of exhaustible resources including disposable chopsticks, wood flooring, and other solid wood products, levying a 5 percent tax on them. According to Xinjin News, China produced 85 million square meters of solid wood flooring in 2004, most of which was made by individual manufacturers. And the country's northern provinces produce an estimated 15 billion disposable chopsticks for export to Japan and Korea every year, consuming some 13 million cubic meters of timber.

As Chinese consumption levels have changed with rapid economic development and a rise in personal incomes, the country's decade-old consumption tax had failed to keep pace with these changes. Therefore, a new range of items, such as golf equipment and yachts, have been added to the revised policy, levied at the rate of 10 percent. Meanwhile, commodities that have become everyday essentials, such as shampoo and moisturizers, have been removed from the list. Other items now taxed at lower rates include cigarettes, alcohol, jet fuel, automobile tires, and motorcycles.

China first levied a tax on consumer goods in 1994. The initial ruling covered 11 categories of goods, including cigarettes, alcohol, cosmetics, skin- and hair-care products, jewelry, firecrackers, gasoline, diesel, automobile tires, and motorcycles. In total, China's tax revenue, exclusive of tariffs and agricultural taxes, reached 3.09 trillion yuan (US $380.6 billion) in 2005, increasing 20 percent from 2004.