By Tompkins International Staff
China has implemented new rules regarding taxation on imported goods sold online. The central tenet of the change is a standard 11.9% tax added to the price of purchase in the form of value-added and consumption taxes with a 30% discount. For obvious reasons, changes to any tax system rarely come without a bit of negative scrutiny. In the past few days we have heard from some that these moves could hurt eCommerce - but will it?
The short answer is, no. eCommerce and cross border eCommerce sales will continue to grow exponentially in China.
What does this all mean for foreign retailers and brands?
The Chinese government is supportive of the growth of cross border commerce and eCommerce in general. In fact, economic growth through consumption is a central tenet of the new 13th 5 year plan. China's government has taken several steps to make it easier for consumers to buy overseas goods online, including streamlining the customs process for small orders and eliminating the sales tax and cutting the customs duty tax on specific items.
The new system will benefit sellers of products for which the duty is high, such as cosmetics, which are normally hit with a 50% duty tax. However, other items, for which the duty is low, will be modestly more expensive for Chinese consumers to purchase from foreign websites or China based flagship stores on sites like Tmall and JD.com This seems very technical, but really, it is a simplified approach to taxing eCommerce goods in China. This is not much different from how U.S. States have implemented sales tax on eCommerce where previously there was none.
For example, under existing tax rules a Chinese consumer who buys a sweater for $50 on a foreign eCommerce site pays a fee of $10 (20% duty on a $50 purchase), whereas under the new rules he would pay only $5.95 (no duty, but a sales tax of 11.9%.) However, a consumer buying $30 of milk today would pay no duty or sales tax (the duty would be $3, 10% of $30, but that is waived because no fee is charged if the duty is below 50 Yuan ($7.65)), whereas under the new rules she would pay $3.57 (no duty, but a sales tax of 11.9%.)
Demand for most cross border goods is inelastic and the new taxes are simply the result of the Chinese government recognizing that they can make more tax revenue with little impact on cross border eCommerce.
"While it is true that under many circumstances higher taxes can have a cooling effect on demand that is not the case here. Chinese consumers are more than willing to pay premium prices for the trust, quality, and reliability that foreign goods deliver. The new tax will have minimal effect on demand," says Tompkins International Vice President, China, Michael Zakkour. "There will be some industries that benefit greatly, like cosmetics and body care. In the case of food and beverage, there was no tax, and it is not unreasonable for the Government to implement one."
In general some industries will have a slightly negative impact, will not be impacted. China's growing middle-class is willing to pay more for quality. They are becoming less price-sensitive regarding important products that improve daily lives.