General Motors China Tax: Good Or Bad?

It's both good and bad tidings packaged into one announcement for General Motors Company GM, as China announced an increase in purchase tax on small-engine cars, albeit by a less-than-expected rate.

Small cars are defined as those with engine capacity of up to 1.6 liters.

The new tax rate of 7.5 percent becomes applicable in January 2017. The announcement made by the Chinese Ministry of Finance also said the rate would be restored to the normal norm of 10 percent by January 2018.

Can more China trouble be brewing for the company, which saw its shares react negatively on Wednesday to reports that it may invite Chinese anti-trust wrath?

Resurgent Sales Prods A Hike In Tax

Back in October 2015, the Chinese government was forced to reduce the purchase tax to 5 percent from the then-prevailing rate of 10 percent following a notable slowdown in car sales. Reacting to the move, car sales picked up notably in the subsequent months. According to a Wall Street report, a majority of cars sold in China qualify for this tax break.

Dual Concerns Weigh

The move, though a welcome development, due to the interim relief accorded by the less than expected increase in the purchase tax has its pitfalls as well. Primary concern stemming from the development is that majority of sales due for the year 2018 would now be pushed forward to 2017, putting at risk the performance for 2018.

Morgan Stanley sounded out another warning that even with the reduced tax of 5 percent auto sales in China is expected to post year-over-year declines in 2017. Now, the specter of a higher tax rate looms and sales could be worse.

A November High

Ahead of the announcement, worries that the purchase tax may be restored to the normal level by the New Year sent consumers into a buying binge, sending car sales up 17 percent year-over-year in November. General Motors announced that it along with its joint ventures recorded November record sales of 371,740 units in China, up 7 percent growth.

China, with its vast consumer market, is definitely an allure for car makers, although their business could be in troubled waters due to the political change in the United States. Near term, automakers, including General Motors, having a dominant presence in China could benefit from the pushed forward sales, although come 2018, they might have to stare at an inclement buying environment. However, between now and 2018, there is a lot of time and any policy moves in the interim period could impact sales performance in the medium term as well.

Image Credit: By Navigator84 (Own work) [CC BY-SA 3.0], via Wikimedia Commons