China postpones cross-border sales tax over fears of e-commerce slowdown

China's tax authorities have rolled back on their new cross-border sales tax program in an attempt to avoid a pile of problems.

If implemented, the new rules would have meant tighter customs treatment and higher tax rates on overseas goods sold on Chinese e-commerce sites, which previously allowed shoppers to buy imported goods via cross-border e-commerce zones on a special parcel tax rate.

However, when China imposed the stricter tax system last month, social media was filled with pictures of heaps of abandoned foreign purchases at Shanghai Pudong Airport as travelers attempted to avoid the tax fines.

Shanghai customs later said that the posts were falsified rumors "spread by e-commerce companies and consumer-to-consumer (C2C) e-retailers" in order to pressure policymakers, China's official Global Times reported.

However, it looks like the pressure might have worked.

Last week, China's General Administration of Customs (GACC) announced a one-year postponement for some of the new tax policies in 10 e-commerce pilot zones, including Tianjin, Shanghai, Hangzhou, Ningbo, Zhengzhou, Guangzhou, Shenzhen, Chongqing, Fuzhou and Pingtan.

While news headlines were focusing on the adjustment of tax rates, the Chinese government also published the List of Products Eligible for cross-border E-commerce, known as the "Positive List" -- this is what has made the difference.

Under the previous new rule, Chinese regulators brought in a series of changes, such as demanding approvals for special foods, cosmetics and medical devices, significantly raising the regulatory bar for imports through e-commerce.

Fearing the new list would quickly drag down the growth of China's e-commerce industry, a GACC spokesperson said the one-year suspension could facilitate a smooth transition of the tax policy and enhance a healthy development of cross border e-commerce in China, according China's official Xinhua News Agency.

It looks as though those fears were justified. Data for the first week after the new rules took effect showed a more than 60 percent fall of cross-border e-commerce orders for pilot zones such as Shenzhen, Zhengzhou, Ningbo and Hangzhou. Particularly, as few as 3 percent of the goods in the Zhengzhou pilot zone were able to meet the new positive list, China's Central Television reported.

Meanwhile, tax rate and transaction limit changes still apply. Purchases exceeding 2,000 yuan ($307) for a single transaction in cross-border retail and 20,000 yuan ($3,075) for yearly transactions per person are now levied a full general trade tax.

So now, Chinese e-commerce businesses have been given a brief reprieve. But the question now is - what happens after one year?

The tax rules were implemented to eliminate the price advantage for Chinese e-commerce on overseas purchases. Some analysts argue that heavier tax burdens for foreign brands will make them rethink their strategy in the Chinese market.

"Let's remember, this tax change takes place in a context, a context with extraordinary amount of good news," said Frank Lavin, Chairman and chief executive of e-commerce platform Export Now.

"Alibaba's numbers are record-high. It passed Walmart, becoming the largest retail outlet in the world, and international brands are responding."

Lavin believed the new tax system is a clear message that the Chinese government is trying to normalize its cross-border process.

"What the Chinese government is doing is fitting in the trend," Lavin told CNBC.

"I think what we are really looking at is to tell the foreign brands: 'If you are serious about the Chinese market, you've got to move into the Chinese market. Put your warehouse in China, put your goods into China legally, and set up your e-commerce stores and offline stores appropriately."

For many Chinese consumers, all they care is whether or not the new tax policies will impact their Daigou experience.

The grey market of Daigou - a Chinese term translated as "buying on behalf" - has been a major channel for Chinese shoppers to buy luxury goods that are heavily taxed in mainland China.

Through overseas Daigou agents, products can be brought back to China in person or by mail without declaring at customs or paying import duties.

Daigou is not a risk-free business. Once caught by the customs authorities, both agents and consumers could face smuggling charges, resulting in large fines, or even jail sentences.

However, it seems to be a risk that many are willing to take.

"The demand for overseas purchases is huge," said Jan Qu, 30, a part-time Daigou agent based in New York. "Cheaper prices are just one reason. Many Chinese shoppers also have doubts in the quality of domestically-made products and that's why they are buying overseas."

Despite occasional punishments, law enforcement towards Daigou has been relatively loose, helping this grey market boom in recent years.

Daigou sales contributed by Chinese shoppers, although saw a decline since 2014 partially due to China's economy slowdown and corruption crackdown, is now estimated to be worth 43 billion yuan, or roughly 38 percent of all luxury sales in mainland China, according to a report by Bain & Company.

And China's flourishing e-commerce sites and social media, such as Alibaba-backed Taobao, China's twitter-like Weibo and the Tencent-backed Wechat, are all helping this grey industry to get bigger.

"I have clients on all Taobao, Weibo and Wechat," said Qu. "Buyers on Taobao are more suspicious because they don't trust me, but clients on Weibo and Wechat are mostly introduced by friends so they wouldn't worry too much."

While Chinese shoppers are big spenders overseas, brick and mortar stores in China have been losing profits, weakening China's efforts to boost domestic consumption and resulting in a big loss of the government's tax revenue.

In 2014, cross-border e-commerce and overseas purchases reached hundreds of billions of yuan, while the personal postal article tax generated just 1.3 billion yuan for the government.

The tougher tax rules on cross-border e-commerce purchases - even though they are now a year away - have made many Daigou agents worried about stricter airport customs checks.

Typing in the keyword "Daigou" on Taobao.com, China's biggest e-commerce site showed nearly 15 million items for sale, ranging from luxury brand bags to Japanese cosmetics.

While many are complaining stricter customs checks at airports, on China's social media, there's never enough criticism towards China's fake goods and costly custom duties.

One Weibo user said that when Chinese people go overseas they like to bring gifts home and are happy to pay for the real article rather than the fake goods that are flooding China.

The user's view is agreed by 28-year-old Qi Gu, a part-time Daigou agent based in Japan.

"I think private Daigou businesses will remain popular," Gu told CNBC. "It will not die until one day when we no longer have that many fakes back home."

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