Chinese aren't happy with the new tax regime on luxury imports

China kicked off on April 8 a new tax regime on luxury goods, after unveiling the new rules just a day earlier.

Under the new regime, Chinese tourists who bring in foreign goods worth over 5,000 yuan are required to pay hefty tax. And they would be treated as smugglers if they carry suitcases full of luxury items.

This has prompted several tourists returning home in the past two days to dump their goods at the Shanghai and Beijing airports, rather than paying the huge tax or suffering an even worse fate.

Over the weekend, many of my Chinese friends had bad experience at the customs when they returned from overseas trips.

In one case, a mid-level manager with a state-owned firm followed his usual shopping routine -- a purse for his wife, a toy for his kid, chocolates for his colleagues and a bottle of whiskey for himself -- as he returned from a business meeting in Europe.

The goods were worth around 5,000 yuan in total, but customs officials asked him to shell out nearly 3,000 yuan in tax.

He is actually lucky. There are many big spenders who suffered even more, going by online posts on Weibo, China's Twitter-like microblogging platform.

The big spenders mostly went on shopping sprees in Europe and Japan to take advantage of the weaker euro and Japanese yen. Some came back carrying three to four suitcases full of luxury goods, spending more than 100,000 yuan.

If they are lucky, they may be just asked to pay 50,000 yuan in tax. But for those with bad luck, they may find themselves turned over to the police to face smuggling charges.

The Ministry of Commerce, Ministry of Finance and 10 other government departments have jointly issued a circular on imposing taxes on imported goods from online shopping platforms.

From now on, overseas retail goods bought online would no longer be treated as personal postal articles, which enjoyed tax rate lower than that compared to other imported goods.

In theory, this policy should only target online shopping for foreign goods, or Haitao, rather than Chinese travelers who bring luxury goods back home. However, there is always a gray area for policy implementation in China. Chinese customs have a tradition of not strictly following the rules.

In the past, they would usually trust citizens' goods declaration forms without actually checking the suitcases.

Under the new policy, Chinese citizens need to pay tax if they bring in goods worth over 5,000 yuan. The tax rate on clothing and cosmetics items ranges from 30 to 70 percent.

As people have got used to lax implementation of rules in the past, they thought they will be able to get away now, too.

But airports Customs have now decided to take the new rule seriously.

Mainland shoppers are wondering if strict implementation will be the new norm, or if the enthusiasm will last just for a while.

In any case, it's widely believed that mainland shoppers will face more difficulties in bringing back luxury goods from overseas.

There might be two main considerations behind the new tax regime.

First, the government intends to encourage consumers to buy more local products rather than spend enormous amounts on imported goods. That's part of Beijing's efforts to stem capital outflow.

Second, many distributors of foreign brands in China have been lobbying the authorities into tightening regulation over online shopping for foreign goods, according to my information.

The distributors feel that they will have a hard time if most Chinese buy luxury goods overseas directly with lower taxes.

Admittedly, many of the big shoppers are actually "personal shoppers" known as daigou, who fill suitcases with luxury items and resell them back home in person or online.

Generally speaking, from now on, Chinese citizens may have to pay more for buying overseas products. But it remains questionable whether that will lead to a jump in sales of domestic products.

China’s online shopping websites, which are keen to develop cross-border e-commerce, will be affected by the new rules.

The new import tax regime also spells bad news for Hong Kong, as mainland tourists could curb their spending here, causing further damage to the city's tourism and retail sectors.

This article appeared in the Hong Kong Economic Journal on April 11.

Translation by Julie Zhu

[Chinese version 中文版]

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