Siah Hwee Ang says a new tax move by the Chinese government will result in a major shakeup of the multi-billion-dollar cross-border e-commerce retail market in China

By Siah Hwee Ang*

Competition just got tougher for companies engaged in cross-border e-commerce retail activities with China.

Taking effect on April 8, 2016, a new set of tax rules has been applied to cross-border e-commerce retail sales.

The new rules were implemented with the aim of addressing an imbalance in competition created over the last two years a result of encouraging cross-border e-commerce platforms to engage in business-to-consumer (B2C) activities.

What has changed

Before the change, Chinese consumers paid a parcel tax on goods purchased on e-commerce platforms. This was significantly lower than the tariffs and other taxes imposed on general imports.

Typically, the parcel tax stood at 10% for lower-priced goods and up to 50% for luxury goods, if the total value did not exceed 1,000 Yuan.

Parcel tax was the only tax to pay. So for a purchase of 1,000 Yuan of milk powder, the tax for the consumer would be 100 Yuan. For the same price of a branded good, the parcel tax would go up to 500 Yuan.

Under the new rules, consumers will have to pay a value-added tax (VAT) of 17% that comes with a 30% discount on all goods. Luxury goods will have an additional 30%.

For lower-priced goods, this would mean a new tax of 119 Yuan on a 1,000 Yuan purchase. For luxury goods, this would mean a 329 Yuan tax.

The new rules also up the limit on how much consumers can spend to enjoy these new rates—no more than 2,000 Yuan on a single transaction and no more than 20,000 Yuan in a year. Tariffs and additional taxes will be levied on any transactions that exceed these amounts.

Winners and Losers

The new rules will mean the costs will be higher for purchases of lower-priced goods, and lower for purchases of higher-priced goods.

In particular, food, baby products, health products, and other consumer products, i.e. lower-priced imported goods are expected to be affected.

The new rules will help to protect the interests of businesses residing in China that rely on importing. They may even result in re-thinking the price premiums being charged for higher-priced products.

This could spell more bad news for some daigou (overseas personal shoppers who buy and send goods to customers in China) as their cost increases. Daigou were already hit in 2015 when many international luxury brands set up their own online sales channels to reach out directly to Chinese consumers.

Moving forward

The change represents one of the first steps towards regulating the fast-growing cross-border e-commerce activities. More are expected to come, as China moves to regulate its entire internet space.

Despite the change, e-commerce activities will continue to thrive because merchandisers still enjoy some advantages over their counterparts who use traditional importing channels.

The good news for some is that larger platforms like Alibaba’s Tmall and Mia.com, have announced that they will not pass the increased cost on to consumers for the time being.

However, as only larger platform players can afford to absorb this cost, small and medium-sized players will soon face survival challenges.

Although it seems like a marginal tax change, this move by the Chinese government will nonetheless result in a major shakeup of the 900 billion Yuan (NZ$ 202 billion) (2015 value) cross-border e-commerce retail market in China.

Despite the current change, we have to recognise that online retailing only constitutes 15.9% of the entire e-commerce market in China. This number is forecasted to increase to 33.6% by 2019. The upside potential is still significant.

Further, based on a recent survey, Chinese consumers buying high-end products online spend more than 2,000 Yuan on average. The new rules can only result in lower costs for such purchases, if they have any effect at all.

The new rules will certainly allow foreign businesses to single out more affluent consumers who aren’t phased by the slight increase in cost for high quality goods, and may even lead to new thinking on how best to target them.

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*Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a weekly column for interest.co.nz focused on understanding the challenges and opportunities for New Zealand in our trade with Asia.