Why most online vendors in China escape taxes

May 11, 2015 10:49
Taobao is the e-commerce home of relatively small vendors in the mainland. Photo: AFP

The only things that are unavoidable are death and taxes, the saying goes.

But this isn't entirely true when it comes to hundreds of thousands of online vendors in China.

For them, death is unavoidable, but not taxes.

Although there are no official figures about how many online transactions evade tax, researchers estimate that only 20-35 percent of goods bought online are invoiced.

Considering the fact that not all invoiced transactions are subject to tax, it is very likely that less than 35 percent of China’s online sales of goods are taxed.

This means colossal losses to the government, given the sheer size of the country's online market.

China overtook the United States to become the world’s largest online retail market in 2012.

Growth has not abated in the past few years, as online retail sales hit 2.8 trillion yuan (US$450 billion) last year, an increase of nearly 50 percent from the previous year.

As government income growth slows down significantly amid the overall slowdown in economic growth, it is understandable that some tax authorities in economically developed coastal regions of China have been attempting to crack down on tax evasion in the e-commerce sector.

Media reports say Beijing, the Guangxi autonomous region, Jiangsu province, Shanghai, Shandong province and Shenzhen held meetings with local e-commerce operators on the issue.

Guilin city in Guangxi even launched a special tax inspection that included the e-commerce industry, the first time the sector was included in such a scrutiny.

The government campaigns caused a lot of panic among online vendors.

Unfortunately, the central government stepped in quickly. The State Administration of Taxation said in a document released May 6 that governments should proactively explore policies to support emerging industries, which include the e-commerce and internet industries.

The document clearly stated that local governments were not allowed to organize any tax assessments or inspections against a specific emerging, new industry.

This effectively put an end to the tax crackdown launched by the local governments.

Obviously, the central and local governments are split in their opinions on taxing e-commerce businesses.

From a theoretical perspective, local governments have fair and sound reasons to strictly tax online vendors.

No matter whether a transaction is done online or offline, it is of the same nature and should be duly subject to tax.

In addition, taxing online sellers can help create a level playing field for e-commerce and traditional retailers.

It can also help discourage online sellers from exaggerating their sales numbers, a common practice to help attract buyers and enhance the reputation of the vendors.

Since tightening up taxation can be good for the industry, why doesn’t the central government want to do so?

To understand this, it is necessary to first figure out who would be hit hardest in a tax crackdown by local governments.

China has three major groups of online sellers.

The first group are the e-commerce arms of traditional retailers, such as Suning Appliance Co. Ltd.

The second group are business-to-consumer sites such as JD.com and Alibaba Group Holding Ltd.’s Tmall.

These two groups generally issue invoices and their sales are already being taxed.

However, the third group of sellers, mostly registered with consumer-to-consumer (C2C) platforms, often don’t issue invoices and hence do not pay tax.

Alibaba’s Taobao.com is the biggest home for this group of sellers.

Clearly, this group of vendors will be targeted if the government tightens up the taxation of e-commerce.

Individually, the third group of sellers are small and less powerful. But there are nearly 10 million of them.

Combined, they represent an influential class of businesses. More notably, they employ tens of millions of people.

As local governments try to increase their tax revenues, the central government looks more at the big picture of the economy and society.

Premier Li Keqiang has repeatedly stressed that a major goal of maintaining a certain level of economic growth is to ensure employment, which is important to maintain social stability.

Top policymakers do not want to push these small, individual businesspeople to the wall.

Moreover, Li is a great fan of the internet industry and often calls for innovation and entrepreneurship, as reflected in his newly proposed strategy of “internet-plus” and “mass innovation”.

Therefore, the small C2C merchants are expected to continue receiving central government protection until the economy turns good.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.