China is the world’s largest EV market, and this latest development could shake up not just the country’s massive electric vehicle industry and battery supply chain, but the global industry as a whole.

China has brought back its consumption tax on lithium-ion batteries after an 11-year exemption. Domestically made lithium-ion batteries are now subject to a 2% consumption tax since September 1, 2026, but the rate will increase to 4% beginning September 1, 2027, effectively restoring the tax treatment that had been suspended for the battery category since 2015.

The new policy is particularly relevant to the automotive industry, where lithium-ion batteries remain the dominant technology for EVs. That said, the additional tax is imposed on qualifying battery products rather than the entire vehicle, meaning it will not translate directly to a 2% or 4% increase in the price of an EV.

However, the added cost could still work its way through the supply chain depending on how battery manufacturers and automakers divide the expense. Battery manufacturers have sought to pass the new tax on to their automotive customers, while EV makers are pushing back against absorbing the additional cost amid intense competition and pressure on margins.

It’s not just the lithium-ion batteries in EVs that are affected by this reinstated policy. Since lithium-ion batteries are also used in consumer electronics, batteries supplied for products such as smartphones and laptops will also be subject to consumption tax.

However, the impact on the final price of these devices is expected to be much smaller than the headline tax rate suggests, since the tax applies to the battery product rather than the entire smartphone or laptop.

Interestingly, China's policy also creates a tax advantage to pave the way for next-generation battery technologies. Sodium-ion batteries, solid-state batteries, and fuel cells will be exempt from the consumption tax from September 1, 2026, through December 31, 2028, which could provide another incentive for battery manufacturers and automakers to develop and commercialize alternatives to conventional lithium-ion technology.