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Tax turmoil

By Wang Xinyuan Source:Global Times Published: 2013-3-11 23:28:01

Zhang Jindong, chairman of Suning Group, China's largest home appliance retailer by market value, has become one of the more unpopular representatives during the ongoing two sessions, because of a recent proposal.

"I have seen more than 6,000 online comments, all pointing fingers at me and none of them supportive," he was quoted by 21cbh.com as saying Saturday.

As a member of the National Committee of the Chinese People's Political Consultative Conference, Zhang proposed that the nation should be tougher in collecting taxes from e-commerce retailers such as business to consumer (B2C) and consumer to consumer (C2C) retailers, many of whom currently do not pay taxes.

According to media reports, his proposal mainly targets Alibaba Group, which dominates China's B2C and C2C markets, with a share of 57 percent and 95 percent, respectively, in terms of transaction value. Alibaba Group's first-half earnings before interest and tax in 2012 were even larger than the full-year earnings by Amazon, the largest online retailer in the US.

Soon after Zhang's proposal was made public, many criticized him for taking advantage of his political status to attack his major competitor. Zhang's proposal was also seen as a way to defend his own group's interests, as Suning also operates as an offline registered appliance store, which means that it also pays taxes on revenue for its online B2C store.

Many of the 7 million individual store owners selling low-priced items on Alibaba's taobao.com do not pay tax, owing to a lack of regulation and supervision of smaller online retailers in the emerging e-commerce sector.

Taobao reacted by posting a statement on its official Weibo on March 6, saying "we are not opposed to taxes on e-commerce, but we are opposed to imposing a tax right now."

In effect, the statement said, it would be a tax on "young people's employment, hopes and future."

Ma Yun, executive chairman of Alibaba Group, parent company of Tmall and Taobao, said on a recent TV show that Taobao created 10 million jobs and helped young people to realize their dreams by setting up online stores.

He said that 94 percent of the Taobao stores have annual sales revenue of less than 240,000 yuan ($38,598), while only 6 percent of the stores generate enough revenue to be able to pay taxes.

Even if the government decides to collect taxes from Taobao stores, the tax revenue would be a meager 5-6 billion yuan a year, and would also lead to unemployment for many people, Ma said.

Other online retailers also had strong feelings about Zhang's proposals. Brick-and-mortar stores often evade taxes too, and it would be better to suggest more tax cuts and exemptions instead of proposing tougher tax collection, said Li Guoqing, CEO of Dangdang.com, a B2C operator, on his Weibo Thursday.

E-commerce retailer 360buy told the Global Times Thursday that it will pay close attention to the nation's supervision of the e-commerce sector.

Impact for sellers and buyers

"The sales revenue of my Taobao store is hardly enough to support myself. I do not agree with paying tax now," a store owner selling baby products posted on her Weibo Wednesday.

If the small Taobao stores are taxed, the cost will certainly be passed onto consumers, said Yu Xin, a 33-year old white-collar employee who often buys products from Taobao stores.

Even if such opinions are the most common, there are different voices too. It is reasonable for a store to pay tax based on its sales, said Wang Hui, a taobao.com store owner who has sold menswear for over six years.

For Wang, tougher taxing could make the market better organized and curb the current "chaotic competition." There are too many stores that compete relentlessly on price while offering poor products and services, she said.

Since July 2011, 1,991 complaints have been filed at xiaofei51.com - a website devoted to protection of consumers' rights - about fake products, fraud and bad service related to Taobao stores.

Tax breaks

According to China's Tax Law, as long as goods are sold, all selling entities are subject to paying taxes, said Zhang Guangtong, vice president at the school of taxation with the Central University of Finance and Economics.

There is a grey area where some B2C and C2C online stores that do not issue invoices, which allows them to avoid taxes, he said.

China so far has not been vigorous in its tax supervision of the emerging e-commerce sector in order to encourage its development, but it is necessary to foster a fair tax payment system, Zhang noted.

Policymakers should consider exempting small and micro-sized online stores from tax, he said, such as B2C or C2C stores with monthly sales revenue of less than 5,000 yuan.

For stores with higher sales revenue, policymakers could set a simplified percentage such as 1/1,000th or even 1/10,000th of sales revenues, Zhang said.

Self-interest

Alibaba's Ma was merely using the issue of survival and employment at small online stores as an excuse, according to Li Chengdong, an independent e-commerce analyst.

Li pointed out that Alibaba Group itself functions like a regulator as it provides everything from the platform and technologies to logistics services, and it "levies taxes" in terms of the fees that vendors have to pay. So in some ways, Alibaba Group benefits the most from the grey tax areas, Li said.

In the year to September 30, 2012, Alibaba Group made total sales revenue and net profit of $4.1 billion and $536 million, up 74 percent and 58 percent year-on-year respectively, according to a report filed on March 1 by Yahoo! Inc, which holds a 24 percent stake in Alibaba.

Meanwhile, the true reason why Suning's Zhang brought up the tax proposal was to target the larger B2C stores selling home appliances, who are Suning's direct competitors, rather than small individual stores with meager sales, Li noted.

Even though Suning has strong negotiation power with home appliance suppliers and can offer large discounts, many Taobao sellers offer even lower prices than Suning.

Apart from selling fake and counterfeit products, "they simply can't do it unless they avoid paying taxes" Li said.

The sales revenue of many Taobao or Tmall home appliance sellers exceeds 240,000 yuan annually. 

The State Administration of Taxation issued a new measure Thursday.

Starting April 1, Internet or electronic invoices issued by State tax authorities will be applied nationwide. Analysts said this might be a preparation for taxing e-retailers like Tmall and Taobao stores.

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