Ministries at odds over luxury goods tax level

PUBLISHED : Friday, 01 July, 2011, 12:00am
UPDATED : Friday, 01 July, 2011, 12:00am


The mainland's love affair with Gucci and Prada is causing headaches for top officials with the commerce and finance ministries at loggerheads over whether to cut the import tax on luxury goods.

A debate on whether import taxes on high-priced handbags and jewellery should be reduced heated up yesterday when Liu Shangxi, a deputy director at the Ministry of Finance, said tariffs on such goods should be raised to maintain 'social fairness' and protect domestic enterprises. That came two days after a Ministry of Commerce spokesman said levies on mid- to high-end imported goods should be cut gradually to honour China's World Trade Organisation commitments and encourage domestic consumption.

He said government bureaus reached an understanding on the long-term approach to a lower tax regime on luxury goods.

Some economists said the conflicting views of the two ministries showed Beijing had yet to come up with any clear means to keeping mainland shoppers - the world's biggest consumers - spending their cash at home rather than overseas.

'The 12th five-year plan sets the objective to lift domestic spending, but it doesn't say how to make more people buy Gucci and Prada,' said Tao Dong, Credit Suisse chief economist, non-Japan Asia economic research. 'Whether to cut [import taxes on luxury goods] or not is inconclusive because the Ministry of Commerce wants more imports but the Ministry of Finance wants more tax.'

Some analysts estimate the import tax on big-ticket items such as watches, jewellery and handbags could be cut to as low as 2 per cent from the average 15 per cent now. On top of the import tax, imported luxuries are also subject to a value-added tax of about 15 per cent on average.

If the central government goes ahead with the low-tax regime, it means mainlanders will no longer find tax-free regions like Hong Kong so attractive for Louis Vuitton and Chanel handbags, Rolex watches, gold ornaments or diamond rings.

Liu of the Ministry of Finance argued that shoppers, who can afford luxuries, should be taxed more to avoid creating social imbalances. He pointed out that if import taxes were lowered, it would put domestic enterprises in jeopardy, weaken their competitiveness and leave the economy more reliant on imports.

He warned that mainland enterprises could be forced to shut down as a result, and have a 'severe impact' on the economy.

However, Tao played down the threat from luxury foreign brands, saying he has yet to see any 'Chinese versions of Rolex, Prada and Gucci'.

Merrill Lynch-Bank of America economist Lu Ting said cutting import levies and raising the spending power of mainland workers was the right direction for the world's second-largest economy.

A Bain Capital survey released in May showed that the majority of China's luxury spending took place overseas.

This means the domestic economy benefits little from the country's powerful spending on luxuries, which Bain tipped to grow 25 per cent to Euro11.5 billion (HK$126 billion) this year, or ahead of the world's average growth of 8 per cent.

Last year, mainland Chinese spent Euro9.2 billion on luxury goods, a 30 per cent jump from 2009.

Bain also anticipated China was on track to replace Japan as the world's third-largest market for luxury goods in five years, after Europe and the US.

It said Chinese shoppers were increasingly sophisticated and selective, which meant they wanted more choices of goods and better after-sales service.