China is getting tough on the price-arbitrage trend of daigou sales and has introduced a new cross-border tax policy that aims to claw back some lost revenue earnings.
At the beginning of April the Chinese government introduced a new import tax rule for cross-border purchases. Customers who are shopping cross-border now have to pay import VAT and consumption tax, which replaces the old ‘parcel tax’ system that applied to goods ordered from abroad. This also affects daigou agents, who purchase goods overseas to re-sell in China, and Chinese shoppers who make purchases via overseas online platforms, a practice known as haitao. The new policy was announced on 8 April, only hours before it was implemented, highlighting the fact that ‘new regulations can often be sudden and opaque’, according to a Reuters report.
The new tax policy is intended to ‘level the playing field’ for domestic and foreign sellers, says Jing Daily; in practice, over 83% of haitao platforms will be hit by the new tax policy and their online product prices will increase, according to a China Daily report. WeChat merchants and overseas personal purchasing agents are likely to be the hardest hit, especially if higher prices squeeze them out of the marketplace.
The luxury industry is also concerned that the new tax increases will impact cross-border e-commerce sales, apart from cheaper ‘affordable luxury’ items including cosmetics and perfumes, which are priced competitively compared to physical stores selling imported goods. The new tax policy gives a 30% tax break on transactions of 2,000 yuan (up from 1,000 yuan) with an annual limit per person of 20,000 yuan.
The Chinese government has also significantly raised the ‘personal use’ parcel tax for imports of luxury items with a value exceeding 5,000 yuan. Various items popular with shoppers who use tax-free services, including jewellery, golf equipment, watches, cosmetics and perfumes, now carry a higher tax rate of 60%; the highest tax was previously 50%.
The precursor to the new cross-border tax policy looks to be that Chinese customs officials have been addressing the need to reclaim lost duties, independent of any official laws, over the last few months. According to a recent Business of Fashion report, ‘Can China End the Illicit “Daigou” Trade’, it has become increasingly common for legitimately ordered packages to be denied entry into China or ‘lost’ in transit when ordered from sites abroad.
These rumours of lost packages have fuelled the demand for daigou’s ‘grey-market’ system; daigou is deemed a safer bet as the goods have already passed through customs. However, the Chinese authorities have increased their border-control inspections to prevent grey-market sales and have been targeting travellers coming through with large amounts of goods to sell. Earlier this month, at the time the new law came into practice, several photos posted online showed piles of luxury goods (handbags, cosmetics, perfumes) abandoned at the airport, presumably by daigou agents or tourists avoiding the extra tariffs.
Global Blue takeouts:
• The new tax policy could dampen luxury goods sales in the short term, as globe shoppers may be worried about spending more than the tariff laws allow.
• Tax Free Shopping spend overseas might be impacted negatively by Chinese daigou sellers and tourists who are unwilling to pay the higher tariffs to bring goods back into China.
• China’s ‘price tax’ may become a thing of the past as the Chinese government cracks down on the practice of price arbitrage sales for profit.