New tax law makes cross-border e-commerce of cosmetics cheaper!

Online sales of imported goods have grown at a compounded rate of 63 percent in the five years to 2015, reaching 638 billion RMB ($98 billion) and accounting for 17 per cent of China’s total online retail sales, according to data from Mintel Group Ltd.

Last week, the government released a new Tax rule for cross-border commerce that will tighten the control for cross-border trade, especially for products in lower values.

Effective date: April 8th

More flexible tax exemption limit

Each individual in China has a limited amount of goods they can buy via cross-border e-commerce on a single purchase or across a year, before they have to pay full taxes and duties. This personal cross-border e-commerce quota is raised to 2,000 RMB for single purchase, and the annual limit is 20,000 RMB cumulatively. Within this limit, no need to pay import dutiesImport tax exemption limitOld RuleNew ruleSingle time purchase1,000 RMB2,000 RMBAccumulative annual amount20,000 RMB20,000 RMB

China levies parcel tax on low-price items 

Under the previous regulation, the products with tax below 50 RMB were tax-free. The new regulation removes this tax benefit. Instead, the VAT and sales tax will apply to only 70% of the total product price, if the product is under personal quota (i.e: under 2,000 RMB for a single purchase and bellow 20,000 RMB of purchases per individual and per year)

One-time purchase of product under 2,000 RMB the tax is calculated with the following formula:

Product price * (VAT+Sales Tax) * 70%

One-time purchase of product above 2,000 RMB, the tax rate is calculated with the following formula:

Product price * (VAT+Sales Tax) + import duty tax

Impact of new tax law will benefit cosmetics products 

To summarize the impact of the new tax law, here is a side by side comparison of the impact on goods below the personal limit of  2,000 RMB one-time purchase, or 20,000 RMB annual accumulative purchase:ProductIndividual Product priceBefore Tax ReformAfter Tax ReformChangeBaby product, F&B, Health supplement, Home products<500 RMB0%11.9% VAT↑ 11.9%>500 RMB10%11.9% VAT↑1.9%Clothing, electronic, watches, bicycle< 250 RMB011.9% VAT↑11.9%> 250 RMB20%11.9% VAT↓8.1%Cosmetic<100 RMB011.9% VAT + 21% Sales Tax↑32.9%>100 RMB50%11.9%+ 21% Sales Tax↓11.7%

(Note: for products above the personal quota, the tax duties are same as before, taxed at full price of 17%).

This tax reform increase tax rate on lower price items (100-500RMB), but benefits products between (500-2000 RMB).  For some industries, like the baby product, price has a general increase.

For example, a baby milk powder falls under first category 10% tax bracket.  If a milk powder sells for 480RMB. Under the old tax rule, the milk powder is taxed 480 times 10%, 48 RMB tax, and because 48 is below the 50 RMB  tax exemption limit, user will only need to pay for 0 RMB on tax.  But under the new tax rule, there is no more exemption limit, importer will need to pay for 11.9% of total product value, thus the price of a tin of baby milk power will raise 57.12 RMB under the new rule.

Cosmetic industry is the biggest benefiting industry under this reform.  Most of beauty products such as eye creams and moisturizing gels from L’Oreal SA’s Lancome and Korea’s Amorepacific Corp are becoming cheaper for Chinese consumers.  The new tax rule will cause a 11.7% decrease in tax duties for these products.  However, low price cosmetics items (below 100 RMB) will experience a 32.9% rise in tax duties.  

Additional information

Some tax regulation was previously passed to encourage cross-border e-commerce trading:

1. China started a pilot program with a zone in Hangzhou in March 2015

2. The trial was expanded Jan. 2016 to Tianjin, Shanghai, Chongqing, Hefei, Zhengzhou, Guangzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen and Suzhou

Sources:

Official government announcement: http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201603/t20160324_1922968.html

http://finance.ifeng.com/a/20160401/14302046_0.shtml

http://mt.sohu.com/20160328/n442530565.shtml

http://news.mydrivers.com/1/475/475431.htm