The industry generally believes that the excise tax is the focus of the new round of fiscal and taxation reforms, and the auto industry has the conditions for postponing the collection process and sharing taxes with local governments. It is expected to benefit after the "excise tax collection process is postponed and steadily delegated to local governments."

The excise tax reform that the auto industry has eagerly awaited for many years may usher in new progress. On July 31, Wang Dongwei, Vice Minister of Finance, said at a press conference of the State Council Information Office that among the currently existing major tax categories, all excise taxes belong to the central government and are mainly levied at the production and import stages. The next step will be to consider postponing the excise tax collection process and steadily delegating it to local governments, taking into account factors such as the division of central and local government revenues and tax collection and management capabilities, and implementing it steadily by product category and step to expand local revenue sources and guide local governments to improve the consumption environment.

Although some analysts believe that the auto industry has the conditions for postponing the collection process and sharing taxes with local governments, and if local governments can obtain more tax revenue from increased auto sales, it will also benefit local governments in improving infrastructure and the automotive environment. However, Liu Rui, a professor at the School of Applied Economics, Renmin University of China, candidly stated that in terms of promoting automobile consumption alone, the room for maneuver from a tax perspective is getting smaller and smaller, but there is still a lot of work to be done in related supporting links for consumption and use.

Excise tax reform is imperative

The industry generally believes that the excise tax is the focus of the new round of fiscal and taxation reforms. Shenyin Wanguo Securities stated in its research report that since the replacement of the business tax with a value-added tax, local governments have lost their main tax categories, and combined with the decline in land transfer revenues, how to compensate for local revenue sources has become a core issue that needs to be addressed. Therefore, some industry insiders have analyzed that, on the whole, there is limited room for adjustment in China's major tax categories. Compared with VAT and income tax, excise tax is a relatively large minor tax category that is relatively easy for local governments to collect, making it easier to reform.

From the main direction of this excise tax reform, it involves "delegation" and "postponement," where "delegation" refers to the transfer of tax revenue from the central government to local governments; "postponement" refers to shifting the point of tax payment from the place of production to the place of consumption. "Excise taxes were previously levied at the production stage for convenience, but with the development of information technology, some consumer goods are now eligible for taxation at the wholesale and retail stages, which is positive for expanding the tax base and enhancing the sustainability of taxation."

The aforementioned report believes that as local financial pressure gradually increases, it may force the accelerated implementation of reforms. If the local share of excise taxes can be further increased, combined with the relaxation of restrictions on some medium and high-end consumption and the addition of corresponding tax items, local governments' incremental revenue sources may be guaranteed, and local governments may be better incentivized to prioritize the development of consumption. Fan Yong, Dean of the School of Public Finance and Taxation, Central University of Finance and Economics, and Director of the China Fiscal Collaboration and Innovation Center, told the media that shifting the collection process from the production stage to the retail stage seems to be more in line with the principle of taxing goods at the place of consumption and distributing income according to the place of consumption rather than the place of production. Moreover, after excise tax revenue changes from being originally a central tax to being delegated to local governments based on the place of consumption, it can also alleviate the increasingly insufficient financial resources of local governments.

Calls for reform of automobile excise tax continue

Specifically for automobile excise tax, this is a new tax category established in China's 1994 tax reform, aimed at adjusting product mix and guiding consumption patterns. Historically, there have been three adjustments to automobile excise tax: In 2006, the sub-tax items of automobile excise tax were adjusted to include passenger cars and small and medium-sized commercial vehicles, with six tax rates set for passenger cars based on engine displacement; In 2008, the excise tax rate for passenger cars with engine displacements of 3.0L and above was significantly increased, while the excise tax rate for small displacement passenger cars with 1.0L and below was reduced; In 2016, a 10% excise tax was imposed at the retail stage on luxury cars priced above 1.3 million yuan. It is worth mentioning that to support the development of new energy vehicles, domestic consumption taxes are not imposed on them.

However, compared to previous years, the automotive industry has undergone tremendous changes. To achieve the goal of adjusting product mix and guiding consumption patterns through excise tax, the automotive industry has long been calling for excise tax reform, with the main appeal precisely being the "postponement of the excise tax collection process and its steady delegation to local governments" mentioned this time. Ye Shengji, Chief Engineer of the China Association of Automobile Manufacturers, once wrote an article suggesting that the collection process should be changed from the production stage to the consumption stage as soon as possible, and that the tax should be changed from an ad valorem tax to a specific tax, directly reflecting the purpose of taxation and helping to guide consumption. At the same time, it is determined that part of the excise tax will be retained by local governments, allowing them to benefit from collecting excise tax, which will help local governments reverse their traditional practice of prioritizing investment over consumption, strengthen the construction of transportation infrastructure, and encourage and promote automobile consumption. Li Shufu, Chairman of Geely Holding Group, also proposed at a previous session of the National People's Congress and the Chinese People's Political Consultative Conference that under the current excise tax policy, except for super luxury cars, which are subject to an additional excise tax at the retail stage, other cars are taxed at the production (import) stage, which results in production enterprises needing to advance the related expenses. If the automobile excise tax can be fully transferred to the consumption stage for collection, it can greatly reduce the occupation of working capital by production enterprises and is more conducive to enterprises investing funds in technological innovation and product research and development, thereby promoting the high-quality development of the automotive industry.

Little hope for separate adjustment, systematic reform is more important

In Fan Yong's view, shifting the excise tax collection process to the retail stage, compared to the existing collection method, will face significantly increased numbers and distribution of taxpayers, as well as increased difficulties in collection, management costs, and risks of tax loss. However, from a tax administration perspective, the management of goods subject to monopoly and registration, such as tobacco, fireworks, motorcycles, cars, and yachts, is relatively controllable, and shifting the collection process is relatively easy. "The automotive industry contributes approximately 7% of the total excise tax." Huatai Securities also believes that the automotive distribution system has a short chain, and there are relatively clear vehicle registration management norms in various regions. The retail stage is relatively easy to control and can effectively reduce collection costs, so shifting the excise tax collection process in the automotive industry is not difficult at the operational level.

However, Zhao Ying, a researcher at the Institute of Industrial Economics, Chinese Academy of Social Sciences, candidly stated that the focus of this fiscal and taxation reform is on the distribution and adjustment of fiscal resources, and increasing local enthusiasm by granting part of the tax revenue to local governments. Considering the current tax and fee situation in the automotive industry, especially under increasing economic downward pressure, the possibility of implementing tax reduction and fee reduction policies is slim, and it is unlikely that automobile excise tax will undergo separate special adjustments. Liu Rui shares the same view. He pointed out that from the perspective of consumers purchasing cars, taxes in the consumption sector have already decreased compared to before, so in terms of promoting consumption, there is less and less room for maneuver from a tax perspective.

Moreover, objectively speaking, after so many years of friction, there is limited room for reform in individual aspects of the industry, and what is needed now is more of a systematic reform. "In fact, I think there is still a lot of work to be done in the supporting areas of consumption and use, including insurance costs, repairs, fuel prices, etc.," Liu Rui said bluntly. For the automotive industry, it is more important to systematically sort out all aspects of taxes and fees involved and try to reduce taxes and fees at different points. Although the reduction in taxes and fees at a single point may not be significant, when systematically integrated, the consumer experience will be greatly enhanced, and the effect will be very obvious.

Other suggestions: Scientific taxation, merging tax categories

It is worth mentioning that in addition to shifting the automobile excise tax collection process and steadily delegating it to local governments, industry insiders have other suggestions for the reform of automobile excise tax. Han Zhiyu, member of the International Federation of Automotive Engineering Societies Committee and professor at the School of Automotive Studies, Tongji University, once wrote an article pointing out that the tax base based solely on engine displacement should be revised because, in the early stages of industrial development, larger engine displacements led to higher fuel consumption and emissions. However, modern engine technology has decoupled displacement from fuel consumption and power performance indicators, and a single evaluation system based on engine displacement for excise tax is unscientific and unfair, limiting the enthusiasm of automobile companies to explore and apply low-energy technology and, to some extent, deviating from the original intention of promoting energy conservation and emission reduction. He suggested adopting the basic principle of "the more energy consumed, the higher the tax levied," and proposed using the weight of the entire vehicle (curb weight) as the tax base for excise tax collection, with carbon dioxide emissions from automobiles as an auxiliary indicator. Ye Shengji suggested considering adjusting and merging tax categories to establish a modern and new automobile tax system.

"To establish a modern and new automobile tax system, we must focus on long-term development, continuously improve the automobile tax system, give full play to the leveraging role of taxation, and establish and improve a fiscal and taxation system conducive to scientific development." Ye Shengji suggested comprehensively and systematically reviewing China's current automobile tax categories, scientifically analyzing and evaluating the main tax categories and tax burden levels in automobile purchase, ownership, and use, adjusting or merging tax categories with overlapping functions, and gradually forming an automobile tax system that encourages automobile consumption, guides economical use, and promotes energy conservation, emission reduction, and the popularization of new energy vehicles, thereby facilitating a shift from investment-driven to domestic demand-driven development and promoting sustainable development in energy conservation, emission reduction, and the industry. Research institutions have proposed merging the vehicle purchase tax and automobile excise tax.

Automobile excise tax and vehicle purchase tax are two tax categories levied during the production and retail stages of the automotive industry, which have played an important role in regulating the scale and structure of automobile consumption since their introduction. However, there is an issue of double taxation between automobile excise tax and vehicle purchase tax, which to some extent restricts automobile consumption. Moreover, as time goes by, automobiles have transitioned from being luxury goods to mass consumer goods, deviating from the original intention of excise tax to "regulate the consumption of niche luxury goods." More importantly, with the postponement of the excise tax collection process, the issue of double taxation between automobile excise tax and vehicle purchase tax will become more prominent. "The current automobile excise tax is actually a selective excise tax, while the vehicle purchase tax is more in line with the concept of a general excise tax."

"The research institution believes that with the advancement of excise tax reform, vehicle purchase tax and automobile excise tax are expected to merge into a single tax category in the future, maintaining the overall tax burden unchanged while increasing the proportion of local fiscal revenue retention or delegating it entirely to local governments. On the one hand, this can incentivize local governments to promote automobile consumption, and on the other hand, it will also serve as a good supplement to local financial resources. It is undeniable that fiscal and taxation reform is a major undertaking that requires systematic scientific demonstration in line with China's national conditions and should be carried out in a gradual and steady manner. However, the situation is urgent, and to further expand domestic demand and promote sustainable industrial development, the industry is still eagerly awaiting when the new round of fiscal and taxation reform will benefit the automobile sector.

Picture: from the internet

Article: Automotive Horizons

Typesetting: Automotive Horizons