China Ends Tax Exemptions for Lithium and Solar Batteries to Curb Intense Domestic Competition

China has decided to reduce tax exemption benefits and secure tax revenue for its domestic battery industry, which has been plagued by overproduction and intense domestic competition. According to Chinese media outlets including Yicai and Securities Times today (July 19), the Ministry of Finance, the General Administration of Customs, and the State Taxation Administration of China recently released a notice regarding the adjustment of consumption tax policies for certain batteries. The core of the policy is the phased resumption of consumption taxes on battery products that were previously exempt, including mercury-free batteries, lithium-ion batteries used in electric vehicles, laptops, and smartphones, as well as solar batteries. Chinese authorities plan to impose a 2% consumption tax on mercury-free batteries and lithium-ion batteries starting September 1, and increase the rate to 4% from September 1 of the following year. For solar batteries, a 2% tax rate will be applied from April 1 of next year, rising to 4% starting April 1, 2028. However, emerging high-tech products such as sodium-ion batteries and solid-state batteries will continue to receive phased tax exemptions until the end of 2028. Among solar batteries, perovskite batteries, stacked batteries, and gallium arsenide batteries are included in the tax-exempt category. This announcement also marks the official end of the tax exemption policy for electric vehicle lithium batteries, which China has implemented for over a decade. In January 2015, the Chinese government included batteries in the scope of consumption tax, applying a 4% tax rate at the production, commissioned processing, and import stages. At that time, products such as lithium-ion batteries, fuel cells, solar batteries, and vanadium flow batteries were granted tax exemptions, with the intention of supporting the development of the lithium battery and solar battery industries, which were still in their infancy. Since then, China has established itself as the world's largest powerhouse in the battery industry. According to data released by the China Automotive Battery Innovation Alliance, China's cumulative production of power and energy storage batteries reached 1,068.9 GWh in the first half of this year, an increase of 53.3% compared to the same period last year. Cumulative sales increased by 48.6% to 979.4 GWh, and the installation volume of power batteries in vehicles rose by 12% to 335.6 GWh. The problem is that under the authorities' promotion policies, overproduction and excessive low-price competition that undermines profitability have become chronic within the domestic industry. Duan Chao, a chief macroeconomic analyst at Industrial Securities in China, analyzed that this adjustment to the battery consumption tax policy is one of the moderate measures to address neijuan, or intense domestic competition. He explained that if battery companies can pass on the increased tax costs through the supply chain to the export stage, the model of gaining profits externally while pursuing reform internally could succeed. If companies fail to pass on the costs, they will consider exiting the market, which would curb internal overheated competition. With the suspension of tax exemptions for lithium batteries and others, the Chinese government's tax revenue is also set to increase. Chief Analyst Duan projected that while the domestic consumption tax for the electrical machinery industry, which includes batteries, was 5.4 billion yuan (approximately 1.2 trillion won) in 2023, this revenue is expected to grow to the 100 billion yuan (approximately 22 trillion won) range in the future, comparable to the consumption tax on automobiles.
※ Please note: This article was translated by AI and may contain errors.