China to reduce EV tax incentives, with batteries next in line
China’s years-long era of tax incentives for electric vehicles is gradually coming to an end. From 1 September 2026, lithium-ion batteries will be subject to a 2% consumption tax, rising to 4% a year later. The additional cost for an average EV is not yet dramatic, but the decision carries greater significance: the Chinese government is gradually removing advantages from an industry that should now be able to compete without continuous tax support.
The decade-long tax exemption for lithium batteries has ended
Under an official decision by China’s Ministry of Finance, customs authority and tax administration, a 2% consumption tax was applied to lithium-ion batteries from 1 September 2026. The same rate also applies to lithium primary batteries, nickel-metal hydride batteries and vanadium redox batteries, among others. The tax rate will rise to 4% on 1 September 2027.
This ends the previous tax exemption for lithium batteries, which supported the exceptionally rapid growth of China’s battery industry. It is important to clarify, however, that this is not a 2% vehicle tax added directly to an EV in the showroom. The tax applies to batteries and is passed through the supply chain into carmakers’ costs.
According to CarNewsChina calculations, a 314 Ah LFP energy-storage cell cost an average of around 0.365 yuan per Wh in China in August. Using a simplified example of a 60 kWh battery, the 2% tax would increase the battery’s cost by around 438 yuan. At a 4% rate, the additional cost would be around 876 yuan (approximately €112).
That is not an amount that will turn the price lists of BYD, Geely or Tesla upside down. The direction of travel is more important.
Solid-state batteries gain an advantage, lithium-ion batteries no longer do
China is not taxing all future technologies equally. Sodium-ion batteries, solid-state batteries and fuel cells will remain exempt from consumption tax until the end of 2028. To qualify for the tax exemption, a product must meet Chinese national standards and the manufacturer must hold the required certificate of conformity.
This makes the decision considerably more interesting from an industrial-policy perspective. China is not ending support for battery technology; it is shifting the advantage from mature lithium-ion technology to next-generation solutions.
LFP and NMC batteries form the core technology of today’s electric vehicles, and Chinese companies dominate their production chain. CATL and BYD have grown into global heavyweights. Beijing can now conclude with considerable confidence that these technologies have come of age.
Solid-state and sodium-ion batteries have not yet reached the same level of maturity. The tax exemption gives them a small but highly deliberate advantage, helping new technologies scale up industrially.
EV buyers are already paying more
The battery tax is not China’s first move to reduce EV advantages. From the start of 2026, the full purchase-tax exemption for new EVs, plug-in hybrids and range-extender vehicles was removed.
In 2024–2025, buyers of qualifying new-energy passenger cars received a purchase-tax exemption worth up to 30,000 yuan per vehicle. From 1 January 2026, such vehicles are taxed at half the standard rate, with the tax incentive capped at 15,000 yuan per vehicle. The current arrangement remains in force until the end of 2027.
In practical terms, this means an effective purchase-tax rate of 5%, while the purchase tax for a conventional internal-combustion-engined car is 10%. The EV advantage has therefore not disappeared, but the state has cut it in half.
China will nevertheless continue direct purchase subsidies for replacing old cars in 2026. Through the national scrappage programme, a buyer of a new-energy passenger car can receive a subsidy of 12% of the vehicle’s price, up to a maximum of 20,000 yuan (approximately €2,570), if the old vehicle meets the programme’s requirements. China has therefore not abandoned EV support, but is changing the structure of its subsidies.
The next tax advantage disappears in 2027
The next cut is already on the calendar. In July, China’s Ministry of Finance, tax administration, and Ministry of Industry and Information Technology decided that, from 1 January 2027, part of the annual vehicle and vessel tax incentive for new-energy vehicles will be removed.
Electric commercial vehicles, plug-in hybrids, including range-extender hybrids, and fuel-cell commercial vehicles will lose their tax exemption. The existing 50% incentive for energy-saving vehicles will also disappear.
An important distinction must be made here. Pure-electric passenger cars will not begin paying annual vehicle tax because of this specific change. China’s tax for passenger cars is calculated according to engine displacement, and an EV simply does not have an internal-combustion engine.
China has therefore not cancelled EV tax incentives in one stroke. Instead, the state is removing them layer by layer.
China can now afford to reduce subsidies
The reason for the policy change is quite simple. China’s new-energy vehicle industry no longer needs the same level of stimulus it received in the 2010s.
For years, the state used purchase subsidies, tax exemptions, charging-infrastructure investment and industrial policy to turn EVs from a niche product into a mass-market proposition. The result is not only a huge domestic market. Chinese manufacturers are now pushing aggressively into Europe, Southeast Asia, South America and other export markets.
There is another reason for reducing tax advantages. China’s EV market is engaged in an exceptionally fierce price war. Excess production capacity and dozens of competing brands have pushed prices down and squeezed manufacturers’ margins. In such a situation, Beijing has little reason to continue tax exemptions for mature technology on the same scale as when EVs still needed state support to reach the market.
The 2% battery tax is a relatively gentle instrument for this purpose. It does not destroy demand, but signals to the industry that the previous tax environment will not last forever.
China’s tax shift could even be uncomfortable for Europe
European carmakers have no reason to open champagne over China’s subsidy cuts just yet. China’s competitive advantage no longer consists solely of a purchase subsidy or one tax exemption.
China controls a large part of the global supply chain for batteries and battery materials, produces EVs at enormous scale, and local price competition forces manufacturers to reduce costs continuously. It is precisely this environment that has made BYD, Geely and other Chinese groups serious rivals for European manufacturers.
Moreover, normalising the tax system could strengthen China’s automotive industry in the longer term. Weaker manufacturers will disappear, more efficient ones will remain, and the state can direct support towards technologies in which China wants to achieve its next advantage.
The tax exemption for solid-state batteries is a particularly telling detail here. Beijing is not ending industrial policy. It has simply decided that it no longer needs to pay as generously for conventional lithium-ion batteries.
For European manufacturers, this could be an uncomfortable development. China’s EV industry is gradually moving away from a stage in which its success could be simplistically explained by state incentives. If manufacturers can maintain their price levels and technological pace after the gradual reduction of support, it will become increasingly difficult to explain the competition through subsidies.
