China Ends 11-Year Tax Break on EV Batteries, Setting Up a Shakeout

China is tightening the fiscal support it has long extended to the new energy vehicle sector. This September, the country reinstated the consumption tax on lithium-ion batteries, and it is also planning to end purchase tax exemptions for new energy vehicles in 2028.

An 11 year old tax break comes to an end

Lithium-ion batteries used in new energy vehicles, a category that includes both battery electric vehicles and plug-in hybrids, became subject to a 2 percent consumption tax again starting Sept. 1, with the rate set to rise to 4 percent in September 2027. The tax exemption for lithium-ion batteries was first introduced in 2015, when China waived the 4 percent consumption tax on them to help nurture the growth of its new energy vehicle industry. This marks the first change to that policy in 11 years. Newer battery technologies such as sodium-ion and solid-state batteries have yet to see widespread adoption and are not directly affected by the change for now.

A shakeout as demand cools

The tightening comes as growth in China's new energy vehicle market slows and the sector's outlook dims. Years of support through purchase tax exemptions, consumption tax waivers on batteries and other incentives drew hundreds of vehicle makers and battery producers into the industry, but also left it grappling with overcapacity and intensifying price wars. As fiscal support is gradually withdrawn, many analysts expect the shift to speed up a shakeout within the sector, pushing weaker, loss making companies toward an accelerated exit and further concentrating the market around its leading players.