The End of Taobao Bargain? China to Tax Online Business in New Tax Law

China's revised draft of tax administration law (Chinese version here) has been put on public notice and will be voted on People's Congress on March. A newly created Article 19 requires that online store owners must clearly exhibit tax registration information on their web-shop's home page. This means individual online shops, particularly Taobao sellers, will be officially taxed.

Source: Courtesy Google
I feel fortunate that I have closed my Taobao boutique selling Japanese beauty products three years ago.  It used to be a low-fixed-cost and high-profit part-time occupation, as one needn't pay for license or rents to start a business. For individually imported foreign goods, custom tax was normally evaded, too. This results in a much lower selling price for the same product than it is in entity boutiques and department stores, both of which have now been abandoned by buyers. 

On the other hand, Taobao is almost a perfectly competitive market for common goods and services. Both the entry requirement and maintenance fee are low for sellers, and there are about 0.6 billion active buyers who can choose to purchase the same good, say a Kanebo collagen facial mask, from hundreds of different sellers. Therefore, there is little chance of huge arbitrage and sellers sometimes pay extra to Taobao to promote their product and increase sales. If online business are taxed in value added method, these shop owners will suffer from both squeezed profit and discouraged buyers. It can be expected that one-third of the current Taobao sellers and 10 percent of Tmall store owners will disappear.

However, taxing on Taobao coordinates with business regulations that supervise online transaction, and can address the problems arising from Taobao's popularity. Forgery and products with inferior quality than stated are common phenomenons in today's online business that people trade on a buyer beware basis without standardized regulation. Illegal products ranging from anesthetic drugs, banned weapons to pirated publications can all be found on Taobao by typing specific jargons. For better protection of consumer's rights, Taobao certainly needs such a detox that promotes better transparency and legal activity. It also motivated store owners to improve customer service and strategize better risk management.

At the same time, not all discouraged Taobao dealers will exit from online business. Another regulation vacuum exists in China's online business administration where private social network, namely the WeChat, has become another responsive platform for commodity trading. Many Taobao sellers keep in touch with their VIP buyers through Wechat contacts and they transact directly through Alipay or bank transfers. It might be possible that more exclusive social network apps in favor of online trade will be developed for tax evasion purpose. This negative effect should also be considered and preempted before the proposed tax law takes into effect hopefully in 2016.

This entry was posted on Saturday, 10 January 2015 and is filed under ,,,,,,,. You can follow any responses to this entry through the RSS 2.0. You can leave a response.

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