Chongqing - China is phasing out a more than decade-long consumption tax exemption for lithium-ion batteries used in new energy vehicles (NEVs), following a recent policy adjustment announced by the Ministry of Finance and two other government departments.

According to the announcement, lithium primary batteries, lithium-ion batteries, and other related products will be subject to a 2% consumption tax from September 1, 2026. The rate will rise to 4% one year later.

Photovoltaic cells, also known as solar cells, will be subject to a 2% consumption tax from April 1, 2027. The rate will increase to 4% one year later.

Meanwhile, certain emerging battery products, including solid-state batteries, will remain exempt from consumption tax from September 1, 2026, through December 31, 2028.

China brought batteries under the scope of consumption tax in 2015, setting a standard rate of 4%. At the time, it granted full exemptions to seven types of technologically advanced or environmentally friendly battery products, including lithium primary batteries.

At the time, China’s lithium battery and photovoltaic industries were still in a period of rapid development. The tax incentives supported the expansion of production capacity and the accumulation of technological expertise.

After more than a decade of development, China’s battery industry has made significant gains in scale, supply chain completeness, and technological capabilities. The latest adjustment sends a clear signal that tax support will gradually shift from mature technologies to emerging technologies such as solid-state batteries, encouraging companies to move from capacity expansion toward technological innovation.

Lithium-ion batteries serve as the main power source for NEVs. The renewed consumption tax will increase related costs. However, a CITIC Securities research report said the tax may raise retail prices for NEVs, while the overall impact should remain manageable.

According to data from Shanghai Metals Market, the average price of prismatic lithium iron phosphate battery cells is about 0.39 yuan (0.058 U.S. dollars) per watt-hour. For an electric vehicle equipped with a 60-kilowatt-hour battery, the battery cell cost is about 23,400 yuan.

Based on simple calculations, tax rates of 2% and 4% would increase the cost per vehicle by about 468 yuan and 936 yuan, respectively, suggesting that the overall impact would be manageable.

The actual impact will also depend on battery pack prices, tax deductions along the industrial chain, companies’ bargaining power, and automakers’ ability to absorb additional costs internally.

In addition, the profitability of new energy vehicle companies has weakened due to rising prices for memory chips and upstream raw materials, as well as intense market competition. 

According to the China Passenger Car Association (CPCA), the automotive industry’s profit margin stood at only 3.4% from January to May 2026, below the 6.1% average profit margin among downstream industrial companies.

The market widely views the battery consumption tax adjustment as another policy step toward promoting “equal tax treatment for gasoline and electric vehicles” in China’s automotive industry.

The concept refers to gradually narrowing the tax burden gap between NEVs and gasoline-powered vehicles as the NEV industry matures, requiring different types of vehicles to assume corresponding tax obligations based on factors such as emissions, road use, and commercial purposes.

Cui Dongshu, secretary-general of the CPCA, wrote that gasoline-powered vehicles have long been subject to vehicle and vessel tax and fuel taxes, while some plug-in hybrid vehicles, extended-range electric vehicles, and new energy commercial vehicles have benefited from tax incentives, creating imbalances in taxation and market competition.

As China’s market continues to expand and sales of gasoline-powered vehicles decline, conditions are gradually emerging for NEVs to assume corresponding tax obligations. 

According to the China Association of Automobile Manufacturers, domestic sales of conventionally fueled vehicles totaled 4.831 million units from January to June 2026, down 27.8% year on year. By contrast, domestic sales of new energy vehicles reached 5.09 million units, accounting for 51.3% of total domestic vehicle sales.

On July 3, the Ministry of Finance and two other government departments announced that, starting January 1, 2027, energy-efficient vehicles, battery-electric and fuel-cell commercial vehicles, as well as plug-in hybrid and extended-range electric vehicles, will no longer qualify for their existing vehicle and vessel tax incentives.

Vehicle and vessel tax is an annual tax imposed in China on owners or operators of vehicles and vessels. The amount payable for a vehicle is generally determined by factors including vehicle type, engine displacement, or curb weight.

Cui said the adjustment to vehicle and vessel tax policies for NEVs marks a step toward implementing equal tax treatment for gasoline and electric vehicles in China’s automotive industry. It is also an important tax policy adjustment as the NEV industry moves from a policy-supported stage toward market-driven maturity.