Purchase taxes on Chinese EVs to increase from 2026

From 2026, new energy vehicles (NEVs) in China will face a 5% purchase tax rate, bringing an end to the decade-long era of full exemptions that have supported China’s EV growth. The revised policy sets the rate at half the standard 10% levied on internal combustion engine (ICE) vehicles but will represent a meaningful cost increase to some buyers who have grown used to paying no purchase tax. From 2026, technical requirements for plug-in hybrid electric vehicles (PHEVs) will be tightened, signalling Beijing’s intention to steer the market towards more efficient models.

Overview of the tax change

For EVs priced at RMB300,000 ($42,465) or below (before value added tax), a 5% purchase tax will apply. For vehicles priced above RMB300,000, the purchase tax is first calculated at 10%, from which a maximum of RMB15,000 ($2,123) is subtracted.

Although this policy change has been known for some time, there is uncertainty over how consumers will react, as price has played an important role in supporting demand in China.

Several OEMs, including Xiaomi, NIO, and Li Auto, among others, have announced that if customers lock in orders before November or December 2025, they will cover the tax difference, even if delivery or invoicing occurs in 2026.

What are the reasons for this tax change?

A change of this nature was inevitable, considering EV penetration between January and October 2025 reached 48%. Assuming a 5% purchase tax rate had been in place in 2025, the top five EVs sold in the first 10 months of 2025 would have raised over $1.4 billion in tax revenue. For all vehicles, this would have resulted in well over $10 billion in additional tax receipts. Using Benchmark’s 2026 China forecast, this could increase to over $11.7 billion.

Implications for the future

An increase in purchase taxes may push consumers to bring forward buying decisions, resulting in a sharp rise in December sales. However, growth rates in October and November have been lacklustre in the EV market as the year-on-year comparison shows supressed growth rates due to a very strong end to 2024 setting a high bar.

The resulting impact may push automakers back into aggressive pricing strategies to retain market share. However, the government has sought to limit this through anti-involution measures. OEMs in China have also been positioning themselves for further global expansion with the rise of exports continuing to outstrip domestic growth. Developing policies elsewhere, in particular Europe, will move the goalposts again in coming months in relation to local content requirements, setting the scene for a testing 2026 for Chinese manufacturers.

Longer term, reaching a sustainable taxing regime for a transitioning transportation market is crucial for any market and how consumers initially react can be uncertain. China has shown its flexibility in the past in relation the EV market that it is willing to adapt incentive policies to maintain a smooth transition.