China is scaling back incentives related to electric vehicles, having reinstated the consumption tax on lithium-ion batteries in September and planning to end vehicle purchase tax exemptions in 2028.

As demand growth slows, automakers will have to absorb costs previously covered by incentives if they are unable to pass them on to customers. This could affect the structure of China's automotive market.

In July, Chinese authorities said lithium-ion batteries used in new energy vehicles, which include EVs and plug-in hybrids, would once again become subject to a 2% consumption tax, effective September 1st. The rate will increase to 4% in September 2027.

Newer categories, such as sodium-ion and solid-state batteries, have yet to see widespread adoption. Beijing plans to continue tax breaks for these batteries, shifting development support towards these technologies.

Tax breaks for lithium-ion batteries were introduced in 2015, making them exempt from the 4% consumption tax. China introduced the measure to support the development of the new energy vehicle industry.

This marks the first change to the policy in 11 years. Many companies are expected to pass the additional cost on to customers. Battery maker EVE Energy plans to add the 2% tax to the sales price of its batteries, according to Chinese media reports.

Rebates for EV battery exporters were also reduced in April, from 9% to 6%, and will be eliminated altogether in January.

China ranked first globally in new energy vehicle sales, including exports, in 2025 for the 11th consecutive year, according to an industry body. New energy vehicles accounted for 48% of all new-vehicle sales in China, compared with 5% in 2020.

Government support and market growth have increased competition among manufacturers, which have introduced numerous new models. The changes to incentives indicate a shift towards reduced government support as the market becomes more established.

Authorities also plan to eliminate tax breaks on new-vehicle purchases, directly affecting prices. From 2014 through the end of 2025, the 10% tax on new-vehicle purchases was fully waived for new energy vehicles. Since January, however, such purchases have been subject to a 5% tax. In January 2028, the rate will increase to 10%, the same rate applied to internal-combustion-engine vehicles.

These taxes will increase consumer prices. Combined with a decline in consumer spending amid China's real estate slump, reduced incentives have affected domestic new energy vehicle sales, which fell 10% year on year in the first half of 2026. The reduction in incentives, including those related to batteries, is also likely to affect the supply chain.

"The changes are a competitive advantage for the top competitors," said an executive at major battery maker Contemporary Amperex Technology.