How much impact do tax cuts and price drops have on stimulating consumption?

This year, the government will further carry out tax cuts and fee reductions policy covering more sectors. From April 1st, the VAT rate reduction policy will be officially implemented, reducing the current 16% tax rate of the manufacturing industry to 13%. After the policy published, several luxury car companies announced an official price drop in advance. In the current environment of downward in economy and downturn in the auto market, this government's tax cuts and car price drops have no major impact on the stimulation of auto market consumption, and the effect of indirectly promoting overall consumption boost is limited.

Sincere price reduction

According to the latest tax reduction standard, Vehicle Sales Price = Taxable Price * (1 + VAT rate), when the VAT rate is 16%, the sales price is 116% of the taxable price. When the VAT rate is 13%, the sales price is 113% of the taxable price. When dividing 113 by 116, the results is 0.974. Therefore, the sales price after the tax reduction should be 97.4% before the cut, down by 2.6%.

After this policy was announced, luxury brands have set off a wave of price cuts. Mercedes-Benz, BMW, Jaguar Land Rover and Lincoln have announced price cuts. The price reduction ranged from 6100 to 85,000 yuan. If the 2.6% price reduction is set as a standard, the automakers mentioned above have shown enough sincerity and basically give benefits to dealers or consumers. Some models’ price even has dropped by more than 3%, and the price reduction of imported SUVs sold by Lincoln is up to 6.3%. The official price cuts are made through policy adjustments, which is also the means by which car companies respond to the cold winter in the automobile market.

The discount to the consumer will not reach the expected results.

Can consumers enjoy more than 2.6% discount after the official price cut? Cui Dongshu, Secretary-General of China Passenger Car Association (CPCA) said: “Due to the characteristics of VAT and the competitive pressure of the previous auto market, the future price changes of the auto market will not fall by 3%, and even some models’ prices will increase after the implementation of the Limits and Measurement Methods for Emissions from Light-Duty Vehicles (CHINA 6).”.

At the same time, car companies are also facing pressure from rising costs. Mr. Cui said that manufacturing is the final production stage of consumer goods, but the upstream stage did not cut tax simultaneously. The cost of transportation and storage of raw materials is high, and these cost pressures are difficult to completely offset by reducing VAT.

At present, the substantial discount on the price at the terminal has made many dealers basically unprofitable in the car sales. In response to the downward adjustment of the MSRP, the discount of the dealership may become smaller, so as to balance the impact of the official price drop on the profit of the dealer terminal. That’s why the discount to the consumer will not reach the expected results.

Not much impact on market stimulus

This year's larger tax cuts and fee reductions are actually a significant reform and choice. On May 1 last year, the VAT rate of the manufacturing industry and other industries was only reduced from 17% to 16%. Premier Li Keqiang said: "There is a plan to reduce the VAT rate by one percentage point every year for the next few years, which many companies may not realize in the current situation. We are determined to cut the VAT rate of the manufacturing industry, which accounts for more than 50% of the VAT, by 3 percentage points, to reduce some industries such as construction industry by 1 percentage point, and to ensure all other industries a reduction of the rate."

The purpose of this tax reduction is to relieve the survival pressure of the manufacturing industry, enhance vitality of the industry and increase profit of companies, improving performance of more business operations to indirectly promote the overall consumption improvement of the society.

However, in the current sluggish Chinese auto market, the luxury car market began to encounter cold winter as well. The retail sales in February fell for the first time, by 3.0%. However, the discount sales and price-for-money has become a norm, compared with the 10% or 20% discount at the terminals, the actual discount given by the official is not obvious to the customers, and the impact of promoting consumption will not be obviously as well.

Since tax cuts and fee reductions have not yet been formally implemented, and only four luxury car companies have announced price cuts, many car buyers may temporarily wait. The trend of China's auto market this year is still unclear. The tax reduction will relieve the survival pressure of the manufacturing industry to a certain extent and enhance the vitality of the enterprise, but the limit to the market is still limited.