Local officials are planning to change the way the city's rental car market is regulated in order to reduce taxes on the industry to help it prosper.

The changes may be in place by the end of this year, according to the Shanghai Taxi Administration Office, which is one of several bodies that oversea the sector.

"The industry's identity is very vague. Different government departments put the service in different categories, which creates higher operating costs," said Liu Yali, a senior official with the office.

In shanghai, as well as many other cities in China, rental car companies are under the direction of government taxi regulators.

Similar to taxi firms, they must pay a 1,000 yuan (US$120) road maintenance fee every month for each car in their fleet.

The government finance department, however, considers the industry part of the service sector, taxing it at a rate of 5 percent, 2 percentage points higher than the tax on cab companies.

Regulations in Shanghai also prohibit rental car companies from selling their old models in the city.

They are also charged a 10 percent tax on new car purchases.

All of these taxes and regulations place a heavy burden on rental companies, which need to upgrade their models from time to time to attract customers, said Liu.

The taxi Administration Office says it plans to stop regulating the industry, which would mean an end to the road maintenance fees.

"High taxes lead to high costs in the industry and finally the expense is delivered to car renters," said Li Ming, marketing manager of Shanghai-based Avis China, one of China's leading rental car companies.

"The car rental industry is more mature in overseas markets," said Li. "It is also a major source of used cars in foreign countries."

"If some disadvantageous polices are lifted, the industry will grow faster," said Liu.

Shanghai is currently home to 25 rental car companies, with a combined fleet of 4,500 vehicles.

Avis china, a 50-50 joint venture between the global car rental company Avis and Shanghai Automotive Industry Sales Corp, has 1,500 cars. The company reported a 20 percent year-on-year rise of revenue in the first half.

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