New tax rules could put a dent in Chinese e-commerce sites like Taobao

March 14, 2013
March 14, 2013

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At China’s big political pow-wow last week, the head of one of China’s big brick-and-mortar retailers, BBK, said that only around 30% of goods bought online were invoiced (link in Chinese)—and the rest sold tax-free. That constituted an unfair pricing advantage for e-commerce retailers.

Well, maybe not anymore. The State Administration for Taxation recently announced (link in Chinese) that, starting in April, merchants on online retail platforms will need to issue official invoices with each purchase. Invoices are ultimately what the government uses to measure income and tally an enterprise’s tax bill. Therefore, smaller vendors sometimes try to avoid issuing these.

This could have a big impact on Chinese e-commerce companies. Or not. No one seems very sure.

As it happens, the only party anyone seems confident will be affected is Alibaba Group, China’s biggest digital company (it raked in $4.1 billion in revenues last year). BBK’s chairman actually singled the company out when he alleged that small merchants on Alibaba avoided some 35 billion yuan ($5.6 billion) in taxes in 2012. (Alibaba Group was not available for comment.)

The main reason for this is that while business-to-consumer (B2C) sites like 360buy (aka Jingdong), Dangdang and Alibaba Group’s Tmall  generally already issue invoices, vendors on consumer-to-consumer (C2C) sites often don’t. And with some 7 million individual sellers, Alibaba’s Taobao.com claims around 95% of the C2C market in China.

Taobao.com’s low prices are one of its biggest draws for consumers—and avoiding taxes would certainly help with that. Li Chengdong, an independent e-commerce analyst, told the Global Times that home appliance sellers on both Taobao and Tmall wouldn’t be able to offer the large discounts that they are known for “unless they avoid paying taxes.” If these sellers have to raise prices to recoup their new tax bills, the cost advantage for sellers—and thus Taobao’s advantage—would shrink.

While the new rules were still being mooted, Jack Ma, chairman of Alibaba, dismissed concerns about lost taxes, saying the vast majority of C2C sellers make too little to be liable for tax, and that taxing them wouldn’t generate much revenue anyway.

But tax revenue per se might also not be the point. Invoices give customers legal proof of purchase; buyers without invoices have no legal or commercial recourse when their purchases turn out to be faulty or fraudulent. Tellingly, Suning’s Zhang says fraudulence is a massive problem (link in Chinese) on C2C sites. And a source from within the industry told Quartz that this is an important point of differentiation between B2B and C2C sellers.

Indeed, Alibaba has had problems with fraudulent goods being sold on its platforms. But it’s stepped up the vetting of its sellers, so much so that the US government no longer deems Taobao platforms a threat to intellectual property. However, it’s not clear that the problem is totally gone. For instance, the volume of Taobao.com items on this consumer complaint site isn’t small (link in Chinese).

If the company is indeed gearing up for a public listing this year, it will want to clean up its merchant base all the more—but in a way that minimally dampens its transaction volume. This challenge probably wouldn’t alter investor appetite for an IPO. But the Chinese government taking up this tax issue could make it a little harder to strike that balance, and to do so quietly.

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