This article was published earlier in our weekly newsletter. Sign up through our “Newsletter Sign Up” box on the right.
As the massive price gap between imported luxury goods in China and those abroad has hurt luxury sales in China, the shift toward spending abroad and daigou has caused the Chinese government to miss out on an especially large chunk of tax revenue. As the government gets serious about earning some of that revenue back, its policies appear to be creating major confusion in the short-term among brands and consumers.
As cross-border e-commerce becomes increasingly popular, a new tax policy abruptly introduced by China’s government is intended to “level the playing field” for domestic and foreign sellers. On April 8, the new change that went into effect removed the “parcel tax” system from goods ordered from abroad, replacing it with import value-added tax (VAT) and consumption tax. The policy was released only hours before it was enacted, highlighting the fact that “new regulations can often be sudden and opaque,” according to a Reuters report.
For most luxury brands, this means a tax hike on cross-border e-commerce sales, apart from cheaper “affordable luxury” items such as cosmetics that will be priced competitively compared to brick-and-mortar stores selling imports—the government is giving a 30 percent tax break to transactions 2,000 RMB (USD $308) or less (raising the limit from 1,000 RMB) with an annual limit of 20,000 RMB.
Meanwhile, China has also significantly increased the “personal use” parcel tax for imports of luxury items with a value exceeding 5,000 RMB. While the most expensive tax category was previously capped at 50 percent, the rate has been raised to 60 percent on tobacco, alcohol, jewelry, golf equipment, watches, cosmetics, and perfumes.
Enforcement of import tariffs and taxes has also gotten much more stringent both online and offline. When it comes to cross-border e-commerce, a recent Business of Fashion report finds that it’s becoming more common for packages to be denied entry into China or just lost altogether when ordered from sites abroad without going through the proper channels.
Paradoxically, this has been driving some consumers to opt for daigou items instead, which are a “safer” bet in the sense that they’ve already been smuggled past customs. But Chinese authorities have stepped up efforts to prevent these gray-market sales as well with more border inspections and reports of catching big-time offenders with large amount of goods to sell.
All of these recent issues have caused confusion among both Chinese shoppers and industry professionals. Images have been circulated widely online over the past week of luxury items being dumped at Shanghai's airport allegedly by tourists and sellers refusing to pay the extra tariffs. There were also reports that Chinese movie star Huang Bo was detained at Shanghai’s Pudong Airport over not paying tariffs after a photo emerged of him waiting at customs, but Chinese media reported that both of these stories were untrue rumors. Meanwhile, industry experts told Reuters that the new regulations are also causing confusion, with JD.com’s CEO stating that the company is “still waiting for greater clarity” on what the new policy means logistically.
This could dampen sales in the short-term—shoppers abroad may be worried about spending more than the tax-free ceiling, and a note by Exane BNP Paribas warns investors of an “adverse impact on overseas purchases” by both Chinese daigou sellers and tourists. But Chinese consumers are already finding ways around the new policies by putting items in separate packaging to mail or travel with, showing that when there’s a will, there’s a way when it comes to avoiding the high “China price.”
For more information on daigou sales, download Jing Daily's recent report.