China Tax on Overseas Purchases Set to Kick In

Move seen as an attempt to boost domestic products; could hurt e-commerce players

ENLARGE

Food delivery workers from Meituan, an E-commerce company, on March 1 prepare to deliver orders placed online from a center in Beijing. PHOTO: ASSOCIATED PRESS

March 31, 2016 11:44 a.m. ET

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China is tightening its grip on cross-border e-commerce, imposing a new tax system on overseas purchases that form a growing business catering to Chinese consumers with an appetite for foreign goods.

The changes, announced by the Finance Ministry last week, include raising the so-called parcel tax that is currently imposed on overseas retail products that e-commerce firms ship into China. On top of that, such goods sent directly to consumers will now be treated as imports and will be subject to tariffs and value-added and consumption taxes, whose rates vary depending on the type and value of goods.

The ministry said the changes, which become effective April 8, are intended to put foreign and domestic products on an equal footing. But industry analysts said the move seems designed to give a boost to “made-in-China” products and could dent a small, but growing market for foreign goods sold by Alibaba Group Holding Ltd., JD.com Inc. and other e-commerce players.

Those marketplaces feature nutritional supplements and food by brands such as Ocean Spray, as well as diapers and other baby and maternal products. They form a slice of the 5 trillion yuan ($773 billion) in sales by e-commerce firms in China last year, double the level of 2012, according to Beijing-based research firm Analysys International.

The new levies could dampen some demand, just as an increasing number of retailers world-wide are hoping to sell into China, says Charles Whiteman, senior vice president of client services for MotionPoint, a technology company that helps international retailers sync their e-commerce websites across languages and currencies.

“Increases in prices always have the effect of driving demand down,” but the effect will be “modest,” Mr. Whiteman said. “It probably won’t be too noticeable for branded products,” which consumers are willing to pay a premium for.

Chinese consumers have demonstrated a willingness to pay more for products such as cosmetics, infant formula and other baby products. Chinese e-commerce companies have said that such products form the vast majority of the imported products sold on their websites, because of product-safety concerns in China.

Alibaba and JD.com both said they expected robust demand from Chinese consumers for overseas products, especially high-quality ones, to continue, even with the changes in policy.

The changes in taxes come as the Chinese economy is slowing down and the deceleration is crimping tax revenues. Tax revenues grew 4.8% last year, compared with 7.8% in 2014. Beijing is looking for new sources of growth and revenue, and is trying to guide the economy to rely more on consumption and less on investment and industry. At the same time, Beijing is anxious to build up domestic businesses to provide jobs.

The boom in e-commerce has provided better-priced goods to consumers and created new delivery and other logistics jobs. To nurture the sector, the government since 2012 allowed e-commerce firms to pay just the parcel tax, and not other tariffs, when importing goods through customs in about a dozen cities, including Shanghai and Shenzhen.

The lower taxes have given e-commerce businesses an edge over ordinary importers in China and domestic companies that make similar products, the Finance Ministry said in announcing the tax changes.

“As consumption plays a bigger role in the economy, the government prefers to see outbound consumption flow back,” especially for medium- and high-end goods, said Tan Naixun, an analyst at research firm Analysys International.

Calculating the impact of the changes on merchandise is difficult given that different categories of goods carry different rates. A company that sells infant formula milk, for example, will pay nearly 12% more in taxes if the sale is under 500 yuan because previous exemptions don’t apply, according to Mr. Tan, the analyst.

Luxury goods like jewelry will see extra taxes between 9% and 17%, while some levies on personal-hygiene and cosmetic products could fall since the changes rescind the previous heavier parcel tax on those products.

New tariffs on overseas purchases are likely to do only so much for domestic Chinese companies. Inefficiencies, particularly in distribution, add to prices of local goods. As incomes have risen, Chinese consumers have grown more discerning on both price and quality.

Li Jinyu, a 36-year old who teaches English at a university in Beijing, said she wants to shop locally but finds products are often more expensive than overseas ones.

She said she paid a little over 600 yuan for a pair of boots from London through Amazon.com when they were on sale. The same pair of boots at a name-brand store in Beijing carried a price of 1,900 yuan, she said, so even with the new taxes, the online price is better.

“If I see good deals, I’d still rather buy overseas,” she said.

Amazon.com Inc., which launched what the company calls an “Amazon Global Store” for purchasing products from abroad in China in 2014, didn’t respond to requests for comment.