Last August saw China's key legislators pass eCommerce law to oversee product safety, optimise the taxation of Cross-border eCommerce (CBEC) imports and redress an imbalance between offline and CBEC import channels.
This report, compiled by China Policy takes a look at how things will look in for eCommerce operators once the laws come into force on 1 January 2019.
What is the policy?
The eCommerce Law requires nearly all e-businesses to register as formal businesses. The only exception is farmers selling online, supporting the rural revitalisation policy. Online stores must now pay taxes, while consumers are protected by regulations such as the Food Safety Law. eCommerce platforms are also required to fight counterfeits. The law’s intention is straightforward: increase tax revenue and reign in unregulated online businesses.
Inconsistency with CBEC regulations
This is not the state’s first attempt to regulate online business. The 8 April 2016 New Deal’ cross-border eCommerce (CBEC) customs regulation was postponed three times by State Council, most recently in mid-November 2018, and this time without a deadline.
Aiming to create a level online/offline playing field, the failure of the New Deal reflects design deficiencies.
Treating eCommerce as traditional instead of personal goods backfired: General Administration of Customs (GAC) lacks the capacity to inspect and clea CBEC parcels. These clearance issues are compounded by inconsistencies between the New Deal and the eCommerce Law.
Article 26 of the law states that all CBEC businesses must comply with import and export rules. However, in the latest State Council delay announcement, CBEC retail imports will continue to be considered personal goods exempt from import licensing, registration and filing requirements. As one expert put it, the CBEC chapter in the law is more a statement of principles than practical rules.
Enforcement and impact
Tax enforcement and regulatory supervision will hinge on data. Tracking low value, scattered purchases that are difficult to authenticate is a hurdle. The eCommerce Law requires platforms and electronic payment services to ensure integrity and availability of data for customs.
On 12 November, GAC announced it is setting up an integrated system for CBEC platform data collection, which operators must use starting 1 January 2019. Capturing data along the whole transaction chain, the new platform is expected to streamline enforcement.
Although China has no specific tax rules on eCommerce yet, ‘Regulations on Value Added Tax (VAT)’ stipulate that enterprises and individuals selling goods in China should pay VAT, but that small taxpayers with monthly sales less than C¥30,000 enjoy an exemption between 2018 and 2020.
Unlike registered Tmall stores, most individual sellers (which account for roughly 95 percent of stores) are exempt from VAT since they generally make less than C¥30,000 in sales per month. GAC’s system will render these sellers easy tax enforcement targets after 2020, and prevent sellers from faking records to boost their credit or store rating.
How will things look in 2019?
Over 10,000,000 individual businesses on Taobao must now register, pay tax and comply with regulations. Online sellers and platforms are also now responsible for late shipments, a potentially consequential detail given Trump’s decision to withdraw from the Universal Postal Union.
Withdrawal from the UPO will enable the US to hike shipping prices, pushing costs up further for CBEC retailers selling low-value, small-package goods. Increasing compliance costs will spur industry consolidation.
Larger CBEC businesses may begin using bonded warehouses or buying from domestic distributors to minimise shipping risk. Tax exemptions and other preferential policies offered in CBEC pilot zone, recently expanded to 22 from 15, are another carrot meant to steer eCommerce into regulated waters.
Despite providing support in CBEC pilot zones, the 30 November announcement made clear that daigou trade is forbidden, further squeezing the previously grey area in which many sellers manoeuvred. Those relying on eCommerce platforms will be monitored by the GAC data system.
Daigou businesses operating on Wechat or their own websites might be able to stay in business, but they will face greater risks. Some legal scholars insist purchasing goods overseas on behalf of friends is not a ‘business activity’ until one factors in profits, volume of purchases and time spent.
Regulation will be followed by efforts to standardise eCommerce. The State Administration for Market Regulation’s (SAMR) affiliated National Institute of Standardisation will lead a working group to set up a national CBEC standards system for managing online products, transactions and disputes. With three weeks to go before coming into effect, the law will also be buttressed by new regulations guiding implementation, such as SAMR’s 3 December 2018 ‘Opinions on eCommerce business registration’.
Still more challenges
Beijing is walking a tightrope, trying to bring regulation to an industry whose growth seems conditioned on its absence. The government’s trial and error approach to e-commerce regulation reflects broader challenges. Defining online business is hard enough; data globalisation and consumer privacy protection will be even harder to coordinate.
Want to know more?
Read what the experts are saying about China's new eCommerce laws by downloading China Policy's full report.