The taxation department is considering abolishing the sales tax on small cars while keeping that on luxury cars unchanged, aiming to encourage small car sales, according to Friday's Beijing Daily.

The sales tax on small cars with 1.0 liter engines and below is now three percent of the total price, while that on cars with engines of 1.0 litre to 2.2 litres is 5 percent, and that on cars with 2.2 litre engine and above is 8 percent.

The newspaper quoted an official with the Administration of Taxation as saying that the administration is now working on a plan to readjust consumption tax on cars.

The official said that the tax exemption would provide space for prices cut for small cars, though it might not cause direct price cuts, as the sales tax is now levied on car makers and covered by the overall price.

The price of Chery's QQ, a well-known small car on Chinese market, is 29,800 yuan, and the tax exemption could save car makers nearly 900 yuan.

But as for luxury cars, the tax readjustment will not impact its consumption much, said the paper.

Liu Huan, deputy president of the financial and public management institute of the Central University of Finance and Economics, said government organizations and companies are the major buyers of luxury cars, and they won't easily change their buying habits because of readjusted taxes.

Ji Zhu, Professor at the Beijing Industrial and Commercial University, agrees with Liu. Ji said a tax on gasoline, discussed for several years but not yet enacted, would be much more effective than the readjustment of sales tax in restraining the consumption on luxury cars.

(Xinhua News Agency April 18, 2005)