The China General Administration of Customs (CGAC) has made significant changes to preferential tax policies applied to cross border e-commerce transactions by adjusting tariffs on imported goods. The policy, which took effect April 8th of this year, adjusted the Classification Table and Tax Tariff List of Imported Goods issued in 2012, and was implemented with an aim to level competition between online platforms and traditional brick and mortar import stores. The adjusted parcel tax scheme now only applies to goods for personal use of value exceeding RMB5,000 brought back into China by Chinese nationals, and RMB2,000 for non-residents. Anything below these values is tax exempt. In addition, tax brackets have been reduced from the four levels of 10, 20, 30 and 50 percent, to three. The below table details the new scheme.
Implications for the cross border e-commerce industry
Before the adjustments to the parcel tax scheme, imported goods that were sold via online cross border retail sites were classed as personal postal items and were subject to a comparatively lower rate of about 10 percent for goods less than RMB1,000 in value. Taxes amounting to under RMB50 were also waived as an incentive for exporters selling general consumer goods to China.
Under the new tax scheme, such goods are treated in the same way as ordinary imported goods, subject to import value-added tax (VAT) and consumption tax, which vary according to type of commodity. However, consumers can still enjoy a 70 percent discount on import taxes for single cross border e-commerce transactions amounting to under RMB2,000 (RMB20,000 for transactions per year). Certain low priced consumer products, such as food and baby products, as well as luxury products valuing above RMB2,000, are to be most affected by this adjustment to tax rates.
For example, before the change of policy, the price of a popular German branded baby formula was about RMB258. After the adjustment – where tax exemption on items amounting to less than RMB50 no longer applies – it will be subject to a tax of 11.9 percent, making the total cost RMB289. However, commentators note that e-commerce giants like Tmall and JD.com will likely absorb the tax rise of certain commodities, squeezing profits to increase competitive edge. And where some consumers will lose the desire to buy, the industry will benefit in the long run: previously, some online importers took advantage of the parcel tax to avoid taxes.
Conversely, given proper pricing strategies, the costs of selling higher priced products (below RMB2,000) such as cosmetics, clothing and electronics might fall. For instance, a foreign cosmetic product priced at RMB600 was subject to a 50 percent parcel tax before the tax reform (tax payable was RMB300). After the adjustment, the product can enjoy a 30 percent discount on import VAT (17 percent) and consumption tax (30 percent), making the tax payable total RMB197.4.
Following the tax rate adjustment, the Chinese government issued the “Cross Border E-Commerce Imported Goods List” to clarify what types of goods can be imported under a cross border e-commerce model. The 23-page “positive list”, covering a broad range of products from toys to household appliances, serves to limit foreign manufacturers who use cross border e-commerce as a tax-free channel to export raw materials to China. Customs clearance times for items found on the list will be substantially reduced, allowing goods to reach customers within one to two weeks versus the previous several months. The positive list largely details milk products, healthcare products, alcohol and cereal.
What is the impact on importers?
Where consumers are able to enjoy reductions to tax rates, the overall tax burden will be passed onto importers and retailers, in which the rate will increase almost certainly to more than 10 percent. As for the limitations of the positive list, for products not listed, the regulation is unclear and left to interpretation. The main impact these regulations have on importers is the retail price of commodities. Consumers will not always be deterred by higher prices, as trust and availability will take priority in consumer decisions. Some products will encounter greater obstacles to accessing cross border e-commerce sites as a retail model.
Jake Liddle is an editor at China Briefing, a subsidiary of the foreign investment consultancy firm Dezan Shira & Associates.