New China cosmetics tax policy spells doom for HK retailers

October 21, 2016 11:58
Under the new policy, most cosmetic products sold in China, including upmarket foreign brands, are no longer subject to a 30 percent consumption tax. Photo:

China’s surprising move to remove consumption tax on all non-luxury cosmetic goods to boost spending is like grinding salt in the wound of Hong Kong’s hurting retail sector.

The new policy became effective on Oct. 1, a change which Kwok Siu-ming, co-founder of cosmetics retailer Sa Sa International described as “completely out of the blue”.

Basically, consumption tax, previously set at 30 percent for all cosmetics, will be waived entirely for non-luxury cosmetic products while the tax rate on more expensive cosmetics will be cut to 15 percent, the finance ministry said in a statement on Sept. 30.

Luxury cosmetic products are defined as those sold at more than 10 yuan per millimeter or above 15 yuan per piece.

According to cosmetics retailers, such threshold means almost all cosmetic products, including top brands such as SK-II, Lancome and Shiseido will fall under the non-luxury category.

No wonder, the scale of the tax cut worries Hong Kong cosmetics vendors such as Sa Sa.

Chinese buyers have long been traveling to Hong Kong to load up on cosmetics which are cheaper here because they are tariff-free.

It’s estimated the tax cut would reduce the overall tax rate (such as tariff and value added tax) on non-luxury cosmetic goods to as low as 20 percent from more than 50 percent.

The new policy will take business away from Hong Kong shops as the price gap shrinks.

Given the low labor and rental costs in China, foreign brand cosmetics sold in the mainland may one day be cheaper than those in Hong Kong.

Hong Kong's retail sales slumped 10.5 percent in August from the year before, marking the 18th straight month of decline.

Cosmetics were one of the better performers previously, showing a drop of only 0.9 percent in August.

But the situation could worsen drastically in the months to come.

The sudden tax cut comes as China’s economy is increasingly reliant on consumption to sustain its growth.

Third-quarter GDP growth stabilized at 6.7 percent despite sluggish investment and weak export data thanks to stellar growth by the consumption sector.

The new policy reflects Beijing’s ongoing efforts to further boost domestic consumption.

Last year, authorities slashed tariffs and consumption tax on automobiles, garments, footwear and watches.

This article appeared in the Hong Kong Economic Journal on Oct. 20

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist