Through the Loophole

According to a report on China's e-market released by the China e-Business Research Center, direct online purchases from overseas sites by Chinese consumers totaled RMB 12 billion in 2010, with cosmetics, milk power and handbags the top three products transacted. Overseas online shopping has become the major channel for domestic consumers to buy from abroad. This phenomenon has come to the attention of the Chinese government, which has taken steps to alleviate erosion of its tax base through customs loopholes.

Since September 1, 2010, China customs authorities have reduced the duty exemption cutoff on entry of personal postal articles from RMB 500 to RMB 50. But this has by no means dampened enthusiasm for buying foreign products. According to Fang Hong, the price of her milk power has risen RMB 20 to 30 per can because of the policy, but parents are willing to keep buying imported powder at higher prices to ensure the health of their young ones.

Zhou Shijian, a senior adviser at the Ministry of Commerce, says high customs duties for bulk imports result in steep prices for medium and high-end goods on the Chinese market. "Smaller, personalized packages ordered by individuals online avoid these duties, and domestic outlets cannot compete."

Chinese ministries are talking about reducing import duties on luxury goods to level the playing field for domestic businesses.

Lowering import tariffs should encourage more Chinese to buy high-end products in the domestic market rather than from overseas, Bai Chong'en says. "And to boot the move shows China's commitment to tariff reduction as stimulated under WTO principles."

Since China's entry into the WTO in 2001, average import tariffs have dropped from 15.3 percent to 9.8 percent, but tariffs on imported luxury goods have remained at 30 percent.

Recently, the Chinese government announced it would boost imports in order to achieve a trade balance and relieve upward pressure on the RMB. The government is considering slashing import duties on luxury products such as cosmetics, cigarettes and alcohol.

According to Zhou Shijian, high-end products aside, tariffs on daily necessities should be cut as well. He says the authorities should first clarify what is meant by the phrase "luxury good." He gives the example of an American hair dye product deemed "luxurious," which sells for US $3.5 in the U.S., or roughly RMB 23, RMB 25 in Hong Kong but for RMB 59 on the Chinese mainland. "This remarkable price variance results from import duties," Zhou points out, adding that a major rethink of "luxury" is needed and that tariffs should be cut across the board.

Wu Hangmin, a well-known current affairs commentator, maintains online overseas shopping cannot be considered a tax dodge. As China's increase rate in tax revenue is much higher than its GDP growth rate, this issue must be considered from the perspective of relieving the middle class tax burden and improving people's lives through giving them greater access to the world market. Wu is for reducing import duties, but, as he says, the age of Internet shopping has arrived and is here to stay.