SHANGHAI – While it ravages car and truck sales as well as light-vehicle production, the coronavirus outbreak is prompting Beijing to slash the value-added tax on used-car sales to 0.5 percent from 2 percent.
The long-overdue tax cut, announced this week, may not work wonders to jump-start domestic used-vehicle demand. But it will pave the ground for the market’s healthy development in the years to come.
The used-vehicle market really took hold around 2000 when average Chinese families started to buy cars. In the past two decades, volume has kept growing at a fairly rapid pace.
In 2019, China’s used-vehicle sales rose 8 percent to 14.9 million, following an 11 percent increase in 2018.
Yet, despite the nonstop expansion, the size of the used-vehicle market is nowhere near that of the new cars and light trucks.
While contracting for the second straight year, new-vehicle deliveries still reached 25.8 million in 2019.
That’s in stark contrast to the United States and Europe, where far more used vehicles are sold than new ones each year.
The Chinese market for secondhand vehicles has failed to match the volume of new vehicles because of two main constraints.
The first is segregation. Chinese provinces have long been reluctant to allow local residents to purchase used vehicles from other provinces to help control vehicle emissions. (Older, used vehicles tend to pollute more.)
But this problem has been gradually solved in recent years at the request of China’s central government.
In 2019, interprovince sales accounted for 27.9 percent of used-vehicle deliveries, up from 19.2 percent in 2015.
But the other constraint – simplistic and unreasonably high taxes – was left unchanged.
The current Chinese tax system treats used vehicles the same as other recycled products such as old plastic bottles and imposes a flat 2 percent VAT based on the selling price of a used car or light truck.
That has created a chain of problems. To dodge the tax, most car owners sell their vehicles to other individuals through personal connections or brokers, rather than used-vehicle dealerships.
As a result, only about 10 percent of secondhand vehicles are sold via dealerships while the rest are traded privately each year, according to the China Automobile Dealers Association.
That in turn has made it impossible for automakers, analysts and other stakeholders to develop unified and trustworthy standards to gauge residual values of used vehicles.
To be sure, after the cut in the VAT announced this week, China’s taxes on used vehicle sales still have plenty of room for improvement.
For example, to be fair to dealers, the tax should be based on profits they make from used-car transactions.
China’s used-vehicle sales, crippled by the outbreak, plunged 47 percent to less than 1.06 million in the first two months of this year.
Against such a background, the tax cut, effective May 1 through the end of 2023, is a big step forward to reignite used-vehicle demand and rectify underlying problems with the market.