China implemented new tax regulations for cross-border e-commerce on Friday. The new regulations were issued by three essential government departments on March 24, including China’s Ministry of Finance, the General Administration of Customs and the State Administration of Taxation.
Insiders speculated that the new regulations are serving as China’s attempt to draw consumption back to the domestic market against a slowdown in economic growth. In the meantime, it’ll be a major disruption to the cross-border e-commerce market in China that has been heating up recently.
According to China’s Ministry of Commerce, the volume of cross-border e-commerce in China is predicted to exceed RMB 6.5 trillion in 2016, an annual growth close to 30%. This market segment is popular with everyone from big companies to entrepreneurs. Major e-commerce platforms joining the competition include China’s e-commerce leaders Alibaba and JD.com along with numerous more niche service providers.
So how will these newly implemented tax regulations change the game? AllChinaTech’s team has shed some light on the issue to give you a sense of who may be influenced the most in the near future in this market.
Some will see a challenge but not all
To begin with, let’s take a look at the new tax regulations.
Based on the announcement, essential changes will include the ones below:
1) The previous tax exemption for goods under RMB 50 will be eliminated;
2) Each single purchase will have a limit of RMB 2,000 and every single individual will have an annual purchase limit of RMB 20,000, exceeding this limit will see purchases taxed as general import goods;
3) Tariffs for goods within the limit will be exempted while VAT and consumption tax will be levied at 70% of normal.
Under these new regulations, several popular categories of cross-border e-commerce in China, including baby products, cosmetics and apparel, may see a huge increase in cost.
XIANLIFE.com, a Chinese cross-border e-commerce platform, offered AllChinaTech a table for a rough estimation of the change of costs after the new regulation is implemented.
The chart indicates the change in tax rate of the most popular items on cross-border e-commerce platforms right now. According to the chart, lower priced cosmetics, which was once one of the most popular categories, will see the biggest challenge after these new regulations, with a 47% tax increase. Other commodities such as milk powder, diapers and skin care products will also see minor changes.
Apart from these, items over RMB 2,000 will see a major boost in cost as well, such as luxury goods and electronics. Platforms for relatively high-end products with average product prices over RMB 2,000 may struggle more compared to others.
Bad news? They don’t agree
Though primary e-commerce portals may see a boost in costs, most of them have responded to the new regulations in a positive way.
“I don’t think the change in the tax regulations will bring up the cost of the entire industry, instead, it’s pushing us to make a major reconstruction of our product structures,” said Ren Xiaoyu, CEO of Fengqu.com, the cross-border e-commerce platform owned by China’s leading logistics company SF Express.
Ren thinks because of the previous RMB 50 tax exemption, mass imports of low-priced products, such as beauty masks from South Korea, have flooded the market. Retailers that depend heavily on these products will have to face soaring prices, but, at the same time, the increased costs will urge retailers to enrich their SKUs and product categories, which will reduce the product homogenization in the market.
“This will help cross-border e-commerce sites improve consumer segmentation. The number of relatively pricey but more customised products will increase on cross-border e-commerce platforms,” Ren said.
However, it’s inevitable that cross-border platforms will suffer for a while before they fully adjust to the new regulations.
“The time for us e-commerce portals to get prepared is too short,” Liu Nan, CEO of infant care e-commerce site Mia.com, said in a blog post. “For e-commerce platforms, we need some time to adjust our systems, user interface and product pricing [in accordance with the new tax regulations].”
Meanwhile, healthy cash flow will be essential to cross-border e-commerce platforms considering a potential drop of profit and consumer demand against the increase of costs.
Metao, an e-commerce platform that features tax-free Korean products, was reported to be bankrupt earlier this month. At the same time, Red, one of the biggest cross-border direct purchasing platforms, announced over RMB 100 million in financing. It’s rumored that Red’s new round of financing was led by Chinese tech giant Tencent. The sharp contrast between the two seems to imply the vitality of capital reserves for e-commerce sites in this new round of competition.
“In general, the entire cross-border e-commerce sector will suffer temporarily because costs of all importing channels will increase. But in the long term, it’s beneficial to law-abiding e-commerce platforms. Once the gap in taxes is closed, all enterprises will have to compete through their logistics chain and operational efficiency,” Xiao Xin, CEO of XIANLIFE.com told AllChinaTech.
What might be next?
The implementation of the new tax regulations marks the end of a honeymoon period of policy privileges for Chinese cross-border e-commerce platforms. So for all these cross-border e-commerce portals, what will be the next chance to boost their growth?
Some platforms have already begun seeking differentiation to secure their position in the market.
Buyer platform Ymatou.com launched a channel for live updates on its mobile application to engage consumers in buyers’ purchasing processes. Kaola, an e-commerce platform owned by Chinese portal news site NetEase, announced a media- and content-driven strategy for 2016 to elevate users’ shopping experience with high-quality selected content.
Seeking integration with offline channels can also be a way to differentiate. Xiao Xin, CEO of XIANLIFE.com, revealed that the company is researching the possibility of cooperating with local pharmacies to reach out to more consumers in second- and third-tier cities. Leading cosmetics e-commerce platform Jumei.com also opened its first offline experiential store in 2014 and its second last year in Beijing.
“Some companies may have to face adjustments on their administrative strategies. These sorts of adjustments, of course, won’t be about live or die, but about how to live stronger,” Zhang Zhendong, CEO of Polome.com, wrote in a public response.
The new tax regulation may also become a chance for the entire cross-border e-commerce sector to consider the question of how to grow into something stronger and be more beneficial for practitioners as well as Chinese consumers in the long term.
(Top image from Nicoescudero.com)