Speculations about the future adjustments of sales tax for automobiles are abound in the Chinese media especially with the recent publication of the State Council’s 2009 Work Arrangement for Energy Saving and Emission Reduction in early August.

“Study and readjust automobile sales policy” is clearly stated under Item 7, Update Relevant Economic Policies, in the document.

Local analysts and automotive media are therefore predicting that the government may further reduce sales tax for vehicles with engines of 1.8-2.0 liters and may even waive sales tax for vehicles powered by 1.0L or smaller engines so as to drive up demand.

To a large extent the speculations reflect the hopes of automakers in China in trying to boost their output and sales.

But demand so far this year has been exceptionally high. The reduced sales tax from 10 to 5 percent for passenger vehicles with engine displacement of 1.6 liters or less has greatly boosted sales in the first half. According to the Ministry of Industry and Information Technology (MIIT), China sold 3.15 million vehicles in the first half with engine displacements of 1.6 liters and less, up 45 percent year-on-year. Sales of microvans in the same period have gone up more than 50 percent year-on-year, closing in on last year’s total sales number.

It was good news for economy vehicles and their manufacturers and the industry as a whole, but bad news for the State coffer. In the first half of the year, China lost 6.2 percent in vehicle sales tax year-on-year. The Ministry of Finance would not like to see this continue even though the reduced sales tax has revitalized market demand.

So “study and readjust automobile sales policy” in the recent State Council document on energy saving and emission reduction may have a totally different meaning than the interpretation by the media and industry.

Given the circumstances, it is almost certain that the government will not reduce sales tax of vehicles with engine displacements of 1.8-2.0 liters. Waiving sales tax for vehicles of 1.0 liter and smaller is also wishful thinking. As the State coffer will not want to see vehicle sales tax revenue continue to decline beyond 2009, the most likely “readjustment of automobile sales policy” may involve further hiking sales tax for large-displacement, gas guzzling and heavy-polluting vehicles next year.

If this happens, there is reason to believe that the current reduced sales tax for vehicles of 1.6L and smaller may remain unchanged in the future.

In addition to meeting China’s energy saving and emission control goals, reduced sales tax on economy vehicles have also effectively boosted the market share of local and independent brands, which is in line with the Automotive Industry Readjustment and Revitalization Plan.