Simply put, consumers who buy NEVs with an invoice amount exceeding RMB 339,000 are required to pay purchase tax. Models that support battery swap get preferential treatment.

(Image credit: CnEVPost)

China has implemented a vehicle purchase tax exemption policy for new energy vehicles (NEVs) since September 2014, and until the end of 2023, consumers purchasing NEVs won't need to pay any purchase tax, except for very few ultra-luxury models.

From January 1, 2024, China's new policy on purchase tax for NEVs comes into effect, which is set to affect consumers' purchasing decisions as well as the pricing strategies of automakers.

For NEVs with purchase dates between January 1, 2024, and December 31, 2025, they will still be exempt from vehicle purchase tax, but the exemption amount will not exceed RMB 30,000 ($4,230) per vehicle, according to a June 21, 2023 announcement by China's Ministry of Finance.

For NEVs with purchase dates between January 1, 2026, and December 31, 2027, the vehicle purchase tax will be levied at half the normal rate, with the tax reduction not exceeding RMB 15,000 per vehicle.

The policy continues to provide additional support for models that support battery swap. When consumers purchase NEVs, if the invoice for the car and battery are separate, the taxable price is the ex-tax price of the vehicle body.

NEVs covered by the policy include pure electric vehicles, fuel cell vehicles, and plug-in hybrid vehicles (PHEVs) including extended-range electric vehicles (EREVs).

In China, the standard vehicle purchase tax is 10 percent, which is what conventional internal combustion engine (ICE) vehicles currently face.

Consumers see car quotes that include a 13 percent value-added tax (VAT) rate. This means that in 2024 and 2025, consumers purchasing NEVs will need to calculate the amount of tax to be paid according to the following formula:

Amount of tax to be paid = Invoice price / (1+13 percent) x 10 percent.

A tax exemption of up to RMB 30,000 means that consumers will still not have to pay any purchase tax when purchasing NEVs with a selling price of up to RMB 339,000 yuan.

Below are a few simple examples to show you how much purchase tax a car buyer needs to pay for different prices of NEVs. To reduce complexity, the prices in the examples below do not include VAT.

If the ex-VAT price of a NEV is RMB 300,000, the purchase tax is RMB 30,000. According to the current policy, consumers can enjoy a tax exemption of RMB 30,000, so they do not need to pay vehicle purchase tax.

For an NEV with a sales price of RMB 500,000, the tax payable is RMB 50,000. According to the current policy, consumers can enjoy a tax exemption of RMB 30,000 and need to pay RMB 20,000 in vehicle purchase tax.

China's policy has always encouraged the battery swap business model, and the new purchase tax policy does the same.

When consumers buy NEVs, if the invoice for the vehicle body and battery are separate, the taxable price is the ex-tax price of the vehicle body.

For models that don't support battery swap, they won't be able to reduce the taxable amount even though the car company invoices the battery and body separately.

Previously, some car companies allowed consumers to take out separate loans for the vehicle body and battery, even if their vehicles do not physically support battery swap, to lower the barrier to purchase. Tis trick won't allow their vehicles to enjoy lower taxable prices.

NEVs that support battery swap should meet technical standards and requirements, and NEV manufacturers should be able to provide battery swap services for users on their own, or be able to provide such services by commissioning a third party, according to the June 2023 announcement from China's Ministry of Finance.

Nio (NYSE: NIO) is currently the leading advocate of the battery swap model, and it has already partnered with Changan Automobile and Geely Holding to jointly develop battery swap-enabled vehicles.

This means that Nio's vehicles, as well as those of its partners using its battery swap network, will be able to enjoy more purchase tax exemptions. A handful of other Chinese automakers offering battery swap-enabled vehicles will also be able to take advantage of this.

In addition to the change in purchase tax policy, China announced new regulations in December that place higher requirements on the technical specifications of vehicles that can qualify for purchase tax exemptions.

From January 1, 2024, models applying for entry into China's Ministry of Industry and Information Technology's (MIIT) catalog of NEV models with vehicle purchase tax reductions will need to meet new technical requirements.

For pure electric models, the 30-minute maximum speed needs to be no less than 100 kilometers per hour, the range no less than 200 kilometers, and the battery energy density no less than 125 Wh/kg.

For PHEVs, including EREVs, the new requirements include a battery range of no less than 43 kilometers, as well as a number of other energy consumption-related conditions.

About 90 percent or more of models meet these standards, meaning less than 10 percent will be affected, according to the MIIT.

The policy sets aside a five-month buffer period. Consumers who purchase models that do not meet the latest technical requirements before May 31, 2024, will still be eligible for purchase tax reductions. From June 1, 2024, models that fail to meet the new technical requirements will be subject to purchase tax.

($1 = RMB 7.0999)

Nio welcomes China's move to extend tax breaks for NEV purchases