The Ministry of Finance, the General Administration of Customs and the State Taxation Administration have announced the end of a decade-long tax exemption on lithium-ion batteries. The agencies will introduce a 2-percent consumption tax on the batteries on September 1 and will increase it to 4 percent on September 1 next year. The end of the exemption is a coming of age for China's new-energy vehicle (NEV) industry, as it transitions from policy-protected infancy to the arena of market competition.

In February 2015, China exempted lithium-ion batteries from the consumption tax in order to support its nascent battery industry and associated industries such as NEVs. More than a decade later, China has become the world's largest producer and consumer of lithium-ion batteries and NEVs, which include battery electric vehicles, plug-in hybrid vehicles and fuel-cell vehicles.

The decision to levy a consumption tax on lithium-ion batteries addresses both the need for the industry's sustainable growth and a range of broader considerations.

The new tax is a step toward equal taxation for gasoline and electric vehicles, which is currently advocated by the market. For a long time, gasoline-powered vehicles have borne taxes such as a refined oil consumption tax as well as a vehicle and vessel tax. The former is included in the price of gasoline to support road maintenance costs. The latter is paid annually by vehicle and vessel owners and, as an incentive, currently does not apply to NEVs. However, exemptions on certain types of NEVs will be canceled as of January 1, 2027.

As NEV sales surpassed 50 percent of China's new car sales in 2025, the NEV industry is now no longer a "seedling" that requires special protection, but rather needs to assume the same responsibility for road maintenance as gasoline vehicles do. Maintaining the current asymmetrical tax burden on gasoline and electric vehicles would distort market competition. Additionally, within China's lithium-ion battery manufacturing industry, profits grew 48.5 percent year on year in 2025, a clear sign it has moved beyond the initial startup phase that required financial support.

Another motivation is curbing excessive competition within the industry. Over the past few years, too many players have entered the industry, resulting in a surplus of low-end production capacity. Levying a consumption tax of 2-4 percent will eliminate low-end production capacity that relies heavily on tax exemptions and make development healthier and more sustainable.

Based on the current average price of lithium iron phosphate cells, a type of lithium-ion batteries widely used in electric vehicles, a 2-percent tax rate will increase NEV production costs by about 400-600 yuan ($59-88) per unit, while a 4-percent tax rate will increase costs by around 1,300 yuan ($191). Such an increase accounts for less than 1 percent of the total vehicle price, far lower than the impact of lithium-ion battery price fluctuations in the past.

However, the long-term impact of the new tax cannot be ignored. According to the policy, lithium-ion batteries that are produced and used by the same entity are exempt from tax. This gives automakers such as BYD, which use self-produced batteries, a greater cost advantage compared to other automakers that purchase batteries externally. This may incentivise more automakers to extend their business upstream into the lithium-ion battery sector, accelerating the integration of the NEV industry.

Since the consumption tax applies only to lithium-ion batteries produced and sold within China, the policy may prompt some Chinese battery producers to build overseas production capacity, reshaping the geographical distribution of the global lithium-ion battery supply chain. Should this happen in the future, it is unlikely to alter China's dominant position in the global supply of lithium batteries.

Copyedited by G.P. Wilson 

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