CHINA’S announcement that it is changing the taxation system for domestic purchases of imported goods sold on cross-border e-commerce websites has raised questions about its implementation and repercussions.

Effective on April 8, the current parcel tax of between 10 percent and 50 percent on imports sold via offshore websites will be replaced with the 17 percent value-added tax and consumption duties, where applicable — the same taxes levied on most products sold in China. However, there will be a 30 percent discount of the total tax payment, according to a statement from the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation.

The policy change is aimed at bringing some uniformity to a system where some online vendors enjoyed a tax advantage. How the change will affect popular imported purchases like cosmetics, baby formula, nutritional supplements and consumer electronics remains to be seen.

"One obvious effect is that imported goods bought through cross-border e-commerce will no longer enjoy a parcel tax exemption of 50 yuan (US$7.7) per order,” Rebecca Wong, PwC China Tax Partner, told Shanghai Daily in a phone interview. “And import value-added tax and the import consumption tax (applicable to designated goods only) would be the new tax cost.”

The new policy sets a cap of 2,000 yuan on a taxable single item and a combined value of 20,000 yuan per person per year. Goods exceeding those limits will attract full taxes under general trade rules.

The Ministry of Finance, in announcing the tax change, said the preferential tax policies that previously favored online purchases were unfair to conventional importers and to traditional retailers.

The announcement was not forthcoming in detail, according to most observers. That left many wondering about its implications. The ministry said a list will be drawn up stipulating which specific categories of cross-border retailing will be affected by the change. Items outside of the list will require separate customs declarations.

Spot checks will still be carried out on orders placed on overseas shopping sites and delivered through the postal service.

The zeal of Chinese consumers for imported goods has created a flourishing trade via online sites. The Ministry of Commerce has predicted that the volume of cross-border e-commerce in 2016 will reach 6.5 trillion yuan, accounting for nearly 20 percent of China's foreign trade.

Shanghai customs said cross-border e-commerce import transactions hit 400 million yuan in 2015, surging 10.2 times from a year earlier.

Nationwide, transaction volume totaled 14.5 billion in the first 11 months of last year, according to Deputy Commerce Minister Zhang Ji. Most of those orders were of relatively small value.

Research firm Mintel said almost three in five consumers have bought foreign products online from domestic shopping websites.

While foreign shopping sites are perceived to have better quality products than domestic sites, consumers point out that domestic websites offers faster delivery and good value for money.

Rapid expansion

Mintel estimates cross-border online shopping will chalk up 18 percent compounded annual growth, hitting 1.46 trillion yuan by 2020.

In January, the State Council, China’s cabinet, extended the number of cross-border pilot zones eligible to trade imported goods at lower taxes to 13 cities. The zones are part of a strategy to attract businesses, create jobs and nurture new business models.

Under the previous parcel tax rules, infant formula and food products valued at less than 500 yuan were generally tax-free. They will now be subjected to the import value-added tax, with a 30 percent reduction allowed as long as yearly purchases don’t exceed 20,000 yuan per person, according to PwC China’s Wong.

Products imported through business channels won’t be affected by the tax change. They will still be subject to general trade tariffs, import VAT and the import consumption tax, where applicable.

“The profitability for each product category varies, hence the tax costs under different business models will need to be evaluated,” Wong said. “It will depend on whether the online retailers transfer the tax cost to individual consumers.”

Xiao Xin, co-founder and CEO of Beijing-based online imported goods retailer XianLife.com, said that consumers seeking to buy products beyond the ones offered by domestic websites may return to personal purchasing agents.

Currently, most of XianLife’s revenue comes from cosmetics, baby and maternity products, with nutritional products catching up. About 65 percent of its products are dispatched through domestic bonded zones, and 35 percent of them are directly shipped from overseas warehouses in countries such as Japan, Germany and Australia.

The company, which received around US$10 million in venture capital investment earlier this month, said it is seeking to bolster its supply chain to ensure smoother delivery for domestic buyers, with plans to expand warehouse facilities into more European countries by the end of this year.

Eva Xu, a Shanghai resident who is expecting a baby in less than one month, said she has been comparing prices of several domestic online retailers for imported infant and maternity products.

“Whenever these websites offer sales, it’s a good opportunity for me to find bargains because I want the merchants to be delivered on time,” she said. “But for other things, I would probably seek overseas websites even though the goods take longer to arrive.”

Sensitive prices

Consumers still have plenty of purchasing channels, such as the “gray market” or personal purchasing agents, but business owners may find their options limited when the new rules come into effect.

Wu Jian, the executive in charge of supply chain operations at Shanghai-based online imported-goods retailer 51din.com, said the tax change seems to have been introduced in haste without proper consideration of how it will be implemented.

“For example, it’s still not clear how the tax rate will apply to various product categories and how individuals’ purchases from different websites will be monitored to determine if they surpass purchase limits,” Wu said. “Most cross-border online retailers have stopped importing to domestic bonded warehouses while they wait for further details.”

Wu said his website currently dispatches orders through three bonded warehouses in Shanghai, Hangzhou and Ningbo and will be seeking to introduce more foreign brands to differentiate its product offerings from other retailers.

In assessing the impact of the tax change, Alibaba's business-to-consumer site Tmall said the tax burden for most consumers would increase, especially for baby and maternity products, food and health and nutritional supplements, as well as for certain types of cosmetics and electronic appliances.

“But most overseas brands are not planning to raise their retail prices on Tmall, and retailers with relatively large scales and strong supply chains will feel less impact,” according to an email statement from the site.

Internet portal and online gaming operator NetEase, whose online retail site Kaola.com is dedicated to imported goods, said in an email statement to Shanghai Daily that the new tax rules generally will still give it a price edge, compared with vendors selling through traditional retail channels.

“The new rules seek to set a standard for all players, and, in the long run, that has to be positive for the whole industry,” NetEase added.