SHANGHAI--China said Tuesday it will cut the 10% purchase tax in half on small cars in a bid to boost the world's largest car market, which is grappling with sluggish demand amid an economic slowdown.
The central government said the sales incentive on cars with engines no larger than 1.6 liters is aimed at boosting demand and will be effective between Thursday and the end of next year. Cars sold in China are subject to a 10% purchase tax as well as other duties.
More than 60% of China's car market is for vehicles with engines smaller than 1.6 liters, industry data show.
China's new-car sales have dropped into a slow lane after years of rapid growth. As the economy slows, the government has continued to crack down on corruption and more cities have curbed car ownership to reduce traffic congestion and air pollution. Latest official data show that China's new-car sales fell 3.4% to 1.42 million vehicles in August, following a 6.6% decline in July and a 3.4% fall in June.
China's largest auto maker by sales, SAIC Motor Corp. 600104 5.77 % , last month forecast zero growth in industrywide sales of passenger and commercial vehicles this year. The government-backed China Association of Automobile Manufacturers in July slashed its forecast for China's auto market in 2015 to a 3% gain, from a prior estimate of 7% growth.
Car manufacturing is a pillar of China's economy, accounting for more than 10% of the country's gross domestic product, according to the statistics bureau.
The last time China lowered the tax for small cars was in 2009, when the global financial crisis took a toll on auto demand. That prompted a 53% surge in passenger-car sales that year, which helped China supersede the US as the world's largest auto market.
Hoping to rejuvenate the economy, China's central bank in August cut interest rates for the fifth time since November and lowered for the third time the amount of deposits banks must hold in reserve. The People's Bank of China also slashed the required reserves that auto-financing and leasing companies must hold to improve demand for cars.