CHINA is considering cutting value-added tax on second-hand car auction companies to boost the used-vehicle market, according to government officials.

The VAT for used-car auction firms may even be abolished, people familiar with the matter told Shanghai Daily yesterday. The existing rate is four percent.

"The lowered tax will enable second-hand car auction companies to be more competitive with dealers," the source said. Car maker's dealers, which offer trade-ins on old models with incentives to boost new car sales, pay two percent VAT while the public trading market, where most second-hand cars are sold, charges no VAT.

The tax reduction is part of a new policy to boost trading of second-hand vehicles as the world's second-largest auto market grows.

More than 1.9 million used cars were traded in China last year, up 31.5 percent from 2005, said the China Association of Automobile Manufacturers. The growth rate was 6.37 percentage points higher than that of new car sales and was also the third consecutive year that used-car sales outpaced those of new cars.

The used-vehicle market continue to grow another 12.5 percent to 225,000 units for the first two months nationwide, leading by cities like Guangdong, Shanghai and Beijing.

"The central government is encouraging the trading of second-hand vehicles," said Luo Lei, deputy secretary general of China Automobile Dealers Association. "On the other hand, we are also taking measures to rein in the industry."

China has allowed foreign companies such as US-based Manheim Auto Auction Corp and private investors to enter the used-car market, diversifying operators to meet the growing demand and boost its development.

China's vehicle auction market is still at its early stages. It still lacks a well-developed credit system and access to information systems linking buyers and sellers.