22 February 2019

Online vendors: How real is the tax scare?

Will I be taxed? If so, when?

That’s a question that has been on the minds of thousands of self-employed individual vendors on the Taobao online shopping platform. As of now, the majority of these virtual shop operators are exempted from China’s exorbitant and multifarious taxes and levies, providing a crucial lifeline to stay afloat amid thinning margins in the face of intensified competition. But no one is taking any bets about the future.

Likely to become a victim of its own success, Taobao has become too big in size to be ignored by the nation’s tax departments. For instance, the 35 billion yuan (US$5.78 billion) business the platform generated during the so-called Single’s Day shopping festival on Nov. 11 last year was more than the combined Black Friday and Cyber Monday sales in the US. The huge business has inevitably triggered another around of debate on taxation issues, with some government officials calling for a levy in the second half this year.

A recent poll conducted by the Southern Weekend shows that more than 70 percent of respondents believe online vendors will be taxed and the only question now is the timing of the nationwide levy.

A senior member with the All-China Federation of Industry and Commerce, a semi-governmental chamber of commerce, revealed to the newspaper that Zhejiang, home to Taobao’s parent Alibaba, has been drafting taxation guidelines for more than a year. Although top policymakers in Beijing are said to be humming and hawing over the pros and cons of taxation, some regional authorities are apparently losing no time lobbying for it as they seek additional fiscal income. Three years ago, the Wuhan tax bureau slapped a 4.3 million yuan tax on an online women’s wear shop.

Meanwhile, technical barriers such as data collection on online sales can be easily overcome following a legislation that requires e-commerce platforms to disclose transactions. It appears that everything is shovel-ready except for a nod from the central leadership.

On the surface, the trend must be heartening for leading retailer Suning Commerce Group (002024.CN), whose chairman Zhang Jindong {張近東} once remarked that lost tax from the nation’s online shopping segment exceeded 100 billion yuan in 2012. Zhang had demanded immediate taxation to rein in business “foul play” by the individual Taobao vendors.

Apparently Zhang is pinning high hopes on the proposal as his firm has been burdened with taxes. According to its latest quarterly report, the virtual cum brick-and-mortar retailer paid a total of 2.4 billion yuan during the first three quarters last year. Suning, for instance, has to pay 100 yuan as turnover tax on a 2,000 yuan monitor it sells, no matter whether the product is sold online or offline.

Selling things online in China is not necessarily tax-free, but much depends on the size of the vendor. As a major retailer of consumer electronics, Suning has to pay tax on its online sales, unlike the minnows on the Taobao platform. The problem is that Suning may earn less than the amount of tax it pays on some deals. The firm has seen an 80 percent year-on-year slide in operating revenue during the first nine months last year.

Zhang believes if individual online vendors are taxed on a similar basis, a substantial proportion of them will perish and Suning can regain lost ground.

An expert with the finance ministry told state news agency Xinhua that although tax for online vendors is almost a sure thing, the current business landscape could remain unchanged. He also cited the precedent of tax incentives and rebates for small-sized individual household shops and factories — instead of the 5 percent turnover tax, they are imposed a much lower levy with a cap of 500 yuan per month — to help the smaller vendors.

Also, the State Council moved one step further last August to exempt micro and small-sized businesses with monthly turnover of 20,000 yuan or less from the value-added tax and turnover tax. The reason behind these moves is to leave more money in the hands of the people.

Alibaba founder Jack Ma {馬雲} has revealed that monthly revenue of 94 percent of Taobao vendors is less than 20,000 yuan. It is likely that they will get some preferential treatment even if taxation becomes a reality later this year. In such scenario, the impact on the small vendors could be much milder than feared.

– Contact the writer at [email protected] 


EJ Insight writer

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