China is moving forward with a gradual phase-out of major subsidies and tax exemptions for new energy vehicles (NEVs), impacting lithium battery costs and overall EV affordability. The new measures will affect both domestic and foreign automakers operating in the country, with significant implications for buyers and the broader industry.
New Tax Rules for Lithium Batteries
Starting September 1, 2026, lithium primary batteries and lithium-ion rechargeable batteries will face a 2% consumption tax, ending a long-standing exemption that has supported China’s EV battery sector for over a decade. This tax will double to 4% from September 1, 2027, aligning lithium batteries with the rate applied to ordinary batteries.
Sodium-ion batteries, solid-state batteries, and fuel cells will remain exempt from this tax until at least December 31, 2028, providing a temporary cost advantage for vehicles using these technologies.
Impact on Battery and Vehicle Costs
In August 2026, the average price of domestic 314Ah lithium iron phosphate (LFP) energy storage cells was about 0.365 yuan/Wh (~0.072 USD/Wh). For a typical new energy vehicle with a 60 kWh battery, the new 2% tax adds approximately $65 (~AUD 91) (~62 USD) to the battery cost per vehicle. This increase will rise to $130 (~AUD 182) (~125 USD) when the tax rate reaches 4%.
Buyers of vehicles equipped with sodium-ion or solid-state batteries will continue to benefit from a 4% tax exemption, saving around 200 USD per vehicle until at least 2028.
Changes to Vehicle Purchase and Ownership Taxes
From January 1, 2026, the purchase-tax exemption for NEVs has been replaced by a 50% reduction, resulting in an effective tax rate of 5%. The maximum tax reduction is capped at $2,227 (~AUD 3,110) per vehicle. This means buyers of NEVs priced under $44,534 (~AUD 62,200) can save 5% compared to internal combustion engine (ICE) vehicles.
Preferential vehicle-and-vessel tax treatment will also end on January 1, 2027. The 50% reduction for energy-efficient vehicles and exemptions for battery-electric commercial vehicles, plug-in hybrids, and fuel-cell commercial vehicles will be withdrawn. Annual costs for plug-in hybrids and range-extended vehicles are expected to rise by $45 (~AUD 62) (~45 USD) to $98 (~AUD 137) (~100 USD), while pure electric passenger cars will not be affected.
Competitor Comparison
These policy changes impact all electric vehicles manufactured in China, including those from global brands such as Tesla, Volkswagen, and Toyota. The new tax structure applies equally to domestic and foreign automakers, potentially affecting their pricing strategies and competitiveness in the Chinese market.
Historical Context
China’s vehicle market saw sales of 24.31 million units in 2025, representing a 3.7% increase year-over-year. However, the current year has seen a -4.1% year-over-year trend, reflecting a shifting landscape as subsidies are reduced and market conditions evolve.
Regional Availability and Broader Subsidies
All electric vehicles manufactured in China, regardless of brand origin, are eligible for the remaining subsidies and tax benefits. In addition to direct tax incentives, NEVs in China are exempt from urban road maintenance fees, and benefit from extensive state investment in charging and battery-swapping infrastructure.
Thanks to these measures, the running cost per kilometre for electric vehicles in China can be as low as 1 cent. These advantages are available to both domestic and imported EVs operating within the country.
Why this matters
The gradual removal of subsidies and tax exemptions marks a significant shift in China’s approach to supporting new energy vehicles. As costs rise for lithium battery-equipped vehicles, automakers and consumers alike will need to adapt to a less subsidized market.
This policy change could accelerate the adoption of alternative battery technologies, such as sodium-ion and solid-state batteries, which retain tax advantages for several more years.
What this means for buyers
Buyers considering a new energy vehicle in China should be aware that costs for lithium battery vehicles will rise over the next two years as tax rates increase and purchase-tax reductions are phased out. Vehicles using sodium-ion or solid-state batteries will remain more affordable due to ongoing tax exemptions.
Those planning to purchase a plug-in hybrid or range-extended vehicle should also factor in higher annual ownership costs from 2027 onward. Comparing battery types and timing purchases before further subsidy reductions may help minimize expenses.
Key Specs
- Lithium battery consumption tax (from Sept. 1, 2026): 2%
- Lithium battery consumption tax (from Sept. 1, 2027): 4%
- Purchase tax rate for NEVs (from Jan. 1, 2026): 5% (capped at $2,227 (~AUD 3,110) reduction)
- Tax exemption for sodium-ion/solid-state batteries: Until Dec. 31, 2028
- Average LFP cell price (Aug. 2026): 0.365 yuan/Wh (~0.072 USD/Wh)
- Battery cost increase (60 kWh, 2% tax): $65 (~AUD 91) (~62 USD)
- Battery cost increase (60 kWh, 4% tax): $130 (~AUD 182) (~125 USD)
- Annual cost increase for PHEVs (from 2027): $45 (~AUD 62) to $98 (~AUD 137) (~45–100 USD)
Source
Images sourced from: carnewschina.com
