China is beginning to revoke the tax incentives granted to electric vehicles.

After heavily supporting the growth of electric vehicles, China is gradually starting to reduce the tax incentives available to this sector. A new tax on lithium-ion batteries has just come into effect, while other incentives are set to be phased out in the coming years. And contrary to a common misconception, these benefits are not reserved for Chinese automakers alone.

For years, China has strongly promoted the development of so-called new energy vehicles (NEVs), a category that includes fully electric models, those with extended range via auxiliary power, and rechargeable hybrids. But now that these propulsion systems hold a major share of its automotive market, Beijing is gradually starting to tighten restrictions on them.

Starting from September 1, 2026, lithium-ion batteries will be subject to a 2% consumption tax. The Chinese government has already planned to double this rate, raising it to 4% effective September 1, 2027.

This decision ends an exemption that lithium-ion batteries have enjoyed until now. However, the Chinese government does not treat all technologies equally: sodium-ion batteries, solid-state batteries, and fuel cells will remain exempt from this tax until December 31, 2028.

A few dozen extra euros per electric car

The impact on the price of an electric car is expected to remain relatively limited. CarNewsChina cites a 60 kWh LFP battery as an example. With a 2% tax, its cost would increase by about 438 yuan, which is roughly fifty euros. When the rate rises to 4%, the additional cost would be approximately 876 yuan, or about a hundred euros.

On its own, the amount seems almost trivial. But this new tax is particularly interesting because it reveals insights into the evolution of China’s policy. In fact, the tax on batteries is just another step in gradually reducing the advantages granted to electric vehicles. Starting from January 1, 2026, new energy vehicles will no longer be completely exempt from purchase tax. They will only receive a 50% reduction, capped at 15,000 yuan per vehicle. This measure is set to remain in effect until the end of 2027. In other words, an electric car purchased in China still enjoys a tax advantage over an equivalent gasoline-powered model, but that advantage is now half as generous as before.

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Another change will take effect on January 1, 2027. China will then eliminate several incentives related to the annual tax on vehicles and boats. The 50% reduction granted to energy-efficient vehicles will disappear, as will the exemptions for electric trucks, rechargeable hybrids, and range-extended models covered by this policy.

100% electric passenger cars, however, are a special case: they will remain outside the scope of this annual tax and are therefore not affected by these eliminations.

Incentives Not Reserved for Chinese Manufacturers

This is likely the most interesting point in the context of current trade tensions surrounding electric vehicles. Chinese automakers are often portrayed as beneficiaries of a highly protected domestic market supported by the state. The reality is more complex regarding the tax incentives mentioned here.

The benefits for purchasing an electric vehicle are not contingent on the nationality of its manufacturer. A qualifying vehicle produced in China can take advantage of these incentives, whether it bears the BYD, Geely, or SAIC logo, or those of Tesla, Volkswagen, or Toyota.

This certainly doesn’t mean that China’s auto market is free of protectionist measures, nor that all manufacturers operate there on completely equal terms. Government support for China’s auto industry goes far beyond merely offering tax reductions to car owners.

But the distinction is important: the policies that are being phased out today were primarily aimed at encouraging the adoption of new powertrains, not exclusively domestic brands. Tesla is likely the most prominent example. Cars produced at its massive factory in Shanghai were able to benefit from the accelerated development of China’s electric vehicle ecosystem just as much as those made by local manufacturers.

China’s support for electric vehicles isn’t disappearing

Beijing is therefore reducing certain tax incentives, but it would be premature to conclude that China is abandoning its support for electric vehicles. This support takes on much more structural forms as well. The country has notably established a massive charging network, in addition to battery swap infrastructure developed by manufacturers such as Nio.

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CarNewsChina also highlights a unique aspect of China’s system: since part of the funding for road maintenance is included in fuel prices, electric vehicle drivers do not contribute to these costs in the same way, as they do not buy gasoline or diesel.

Public investment in electrical grids and charging infrastructure also constitutes a form of indirect support for electric mobility. Again, a public charging station in China obviously charges not only cars from Chinese brands.

This is perhaps where the main shift in the country’s strategy lies. After using tax incentives for over a decade to boost the market, China can now gradually reduce these incentives as electric vehicles have become firmly established there.

Author’s Note

There is much talk about the subsidies that electric cars enjoy in China. Yet, Beijing is now beginning to gradually reduce some of these tax benefits. And contrary to a common misconception, they are not reserved for Chinese brands: Tesla, Volkswagen, and Toyota can also benefit from them. So, is China changing its strategy?

Pierre Desjardins