High-end watches and golfing equipment are the latest luxury goods.	Tax is increased on large-displacement cars.	The tax hike will not curb yacht sales in China.

As part of its taxation system reforms, China in 1994 started to levy consumption tax on 11 categories of goods, including automobiles, cigarettes and liquor. On April 1 this year, the Ministry of Finance and State Administration of Taxation adjusted the rate of consumption tax and the scope of products upon which it is levied. The changes include subjecting golf gears and balls, high-end watches, yachts, disposable wooden chopsticks, and wooden floor panels to the tax, while skincare products and shampoo were removed from the list.

China’s Rich to Boost the Coffers

The range of goods that comes under the umbrella definition of “luxurious” has changed dramatically in China in the past two decades. While a simple tape recorder was defined as such in the early 1980, today even a hi-fi sound system is categorized merely as a household appliance. Mobile phones were regarded as a sign of wealth ten years ago, but today, they are seen dangling around the neck or attached to the arms of most urban teenagers. Indeed for most of the people walking down the crowded city streets, there are fewer status symblols that can distinguish the well-off citizen from the average.

This, a Ministry of Finance official believes, is the reason why the consumption tax system needs an overhaul. Many products that were once deemed high-end have entered the mainstream, prodding the government to review the definition of luxurious goods, and accordingly adjust the tax codes.

Take cosmetics, for instance. Back in 1994, only a small proportion of the population could afford them. But nowadays, skin creams, shampoos, hair conditioners and perfumes are daily necessities for most Chinese urbanites, and they’re also gaining popularity in the countryside. Thus consumption taxes on these products have recently been removed.

There have been questions about why consumption tax has not been imposed on upscale furniture, clothing and housing. According to officials from the Ministry of Finance, these commodities are difficult to grade. Besides, when deciding to levy consumption tax upon a particular kind of commodity, its impact on related industries and markets must also be taken into consideration. Under-consumption in certain areas has long been an impediment to China’s economic growth.

Dr. Gao Qinghui is chief of the State Information Center’s Strategic Planning Department. He thinks that the latest adjustment to consumption tax demonstrates its function as a tool to remedy the country’s income distribution inequalities. Those that can afford high-end goods, which today include items such as yachts, will have to pay for that luxury. The extra cash in the country’s coffers can then be redistributed to benefit the poorer sections of society.

It is those with moderate incomes but expensive tastes that will bear the brunt of the new consumption tax system. The poor seldom purchase anything beyond their basic needs. Most well-to-dos will meanwhile not be bothered by having to pay extra for an already exorbitantly priced item, and their lust for the best will remain. As the wife of a real estate tycoon recently bragged, “A couple of hundred thousand RMB is a piddling sum for me.”

Having to pay more for cars, petroleum products, disposable chopsticks and wooden floor products is also expected to have a real impact on environmental protection and the efficient use of resources in China.

Liu Xiahui, chief of the Academy of Social Sciences’ Economic Growth Research Office, says that consumption tax in China is usually temporary. It is applied only when the government feels the need to regulate the economy. In a time when the Chinese economy is going through a phase of steady growth, social equality has become a crucial issue. The government’s decision to tax the consumption of luxury items therefore embodies its policies of putting the people first and building a harmonious society.

Trade Partners to Escape Major Bite

Consumption tax is one that is applied only domestically, so any changes do not run counter to WTO rules. An official from the Ministry of Finance claims that the changes will not harm China’s trade partners as long as it is fairly applied to both domestically-produced and imported products. Most of China’s consumption tax is collected at the processing and manufacturing stage, so big foreign brands with plants outside the country will for the most part escape the costs.

When he heard about the changes to consumption tax in China, president of LMVH Yves Carcelle remarked that China is a new continent for the luxury brand makers that have witnessed falling sales in Europe. He believes that the new tax policy will not necessarily impact consumers to a great extent in the magnetic Chinese market, where more and more expensive brands have appeared in recent years.

Mr. Carcelle predicts that China is growing into the world largest market for luxurious goods at a stunning speed. Sales of Louis Vuitton goods in the mainland have been soaring annually by no less than 50 percent. With an economy expanding all the way, China is vitally important to the company’s global business.

He also feels lucky that LVMH decided to enter the Chinese market early. Though he was optimistic from the outset, he admits that China’s luxury brand market has developed far faster than he could have hoped. Chinese consumers have the desire, and more importantly, the money, to buy top-grade commodities, and are well abreast of the latest trends. LVMH has plans to add another three to its nine existing franchises in the Chinese mainland this year, and open another three to four annually in the coming years.

Meanwhile, international cosmetic and hair care products, such as P&G, Unilever and L’Oreal, have applauded the decision to remove their products from the luxury list, but they have yet to announce any price cuts. Business insiders say that consumption tax makes up just 10 percent of all taxes and fees on imported toiletries, so in effect, their prices won’t fall too far.

A report by BNP Prime Peregrine concludes that China is still in an early stage of luxurious goods consumption. It estimates that the number of middle-class families in China will reach 100 million within six years, with average assets of RMB 620,000 per family. The surging middle-class will further propel China’s consumption rate, from 58 percent in 2002 to 65 percent in 2010, and then to 71 percent in 2020. That’s approximately the level of developed countries today.