China: Fuel Tax by Next Year

2 August 2005

Xinhua. China may be finally moving to implement the long-discussed and long-postponed fuel tax. According to the Development Research Center of the State Council and the Ministry of Finance, China will implement the fuel tax policy no later than next year.

Just a few months ago, the Ministry of Finance said that the country would further delay implementation of the fuel tax due to high oil prices and domestic inflation, and that imposing it would add to transportation costs. (Earlier post.) Now the concern appears more to be using the tax as a policy tool to influence China’s future energy consumption and car buying habits.

This year automobile inventories increased, profits of automakers reduced and sales slumped; but the sales of mini cars still rose. This indicated that fuel price has a great impact on the auto industry, said Zhang Hu, an auto analyst.

He said when the fuel tax is implemented, hi-tech and less fuel consumption autos will lead the market. So manufacturers will be more active in developing products that save energy to sharpen competitiveness.

Low emission and new energy source to replace gasoline are on the forefront of auto technology. China’s auto industry will keep up with the trend under the drive of fuel tax, said Chen Ying from Beijing Chemical University.

The fuel tax was first proposed in 1994 as a means of replacing road tolls. A number of concerns have held up its implementation, including volatile prices, squabbling over how to split tax revenues among government agencies, and concern about stifling the domestic auto industry—a cornerstone of Chinese growth.

China’s gasoline and diesel prices are among some of the lowest in the world—analysts say that the government is likely to consider a 20%–50% tax on retail prices, thereby emulating Western Europe’s tax policy to promote demand for more fuel efficient vehicles.

Currently, a consumption tax accounts for 6% of price of retail gasoline and 3% of the price of diesel at the pump.