SHANGHAI — For the second time in less than a year, the subject of China reducing or eradicating taxes on luxury goods has once again come up in government-run media.
This story first appeared in the March 13, 2012 issue of WWD. Subscribe Today.
Last June, a report in the state-run 21st Century Business Herald citing anonymous sources said Beijing would cut or eliminate taxes on certain luxury goods by the beginning of October 2011. Those tax cuts never happened.
Last week, Wei Jianguo, a former commerce ministry official, told the China Daily newspaper that it is likely import taxes on luxury goods will be lowered sometime this year. “There will be at least two rounds of reductions this year on a large range of goods,” Wei said, according to the newspaper.
There remains widespread skepticism whether the tax cuts will be put in place, and, if they are, whether the move will have much impact on Chinese consumers and the luxury brands selling products to them.
Taxes on some luxury products in China are 45 percent higher than in Hong Kong and over 50 percent higher than the U.S., according to the country’s commerce ministry.
“These rumors do go around a lot,” said Paul French, chief China analyst for Mintel, a market research firm. “My understanding is that the Ministry of Commerce wants to reduce luxury taxes but the Ministry of Finance does not.”
Part of the holdup stems from a disagreement between China’s finance and commerce ministries on implementation of lower taxes on luxury products. The two sides have failed to reach a consensus on the issue, with the Ministry of Finance arguing that promoting the consumption of imported luxury products on the Mainland would help foreign economies and ultimately not do much to boost domestic consumption.
The commerce ministry has said reducing taxes on luxury goods would boost consumption at home, which Premier Wen Jiabao outlined as one of the top priorities for 2012 during his opening address at last week’s National People’s Congress, the country’s annual legislative meetings.
Another priority for the government is bridging the growing gap here between the rich and poor, which some analysts say could be another reason for delays in the tax changes as reducing the cost of luxury goods could be perceived as a move that favors the rich.
“Some of the conflicting forces are quite obvious,” said Torsten Stocker, Greater China partner at consulting firm Monitor Group. “On the one hand, there is a desire to spur domestic consumption. On the other hand, reducing luxury taxes does not exactly send the right signals in terms of enhancing social equality.”
It is also unclear whether cheaper luxury products would boost domestic spending. Annually, millions of Chinese travel abroad to purchase luxury goods, in part, because they are cheaper overseas and also because there is a sort of cachet back home for bragging about a purse or watch bought in Paris rather then Beijing.
There is a “real pride factor” when it comes to buying products overseas, said Charles de Brabant, founder and chief executive officer of luxury consultancy Saint Pierre, Brabant, Li & Associates and an adjunct professor of luxury branding at China Europe International Business School in Shanghai. Lower prices at home would have an effect, but that impact “would be minimal,” he said.
“No, it would not stop [Mainland consumers] from buying abroad,” de Brabant said. “Part of the pleasure of being abroad is having time to shop, buying a product from the country of origin has a sort of emotional value to it. A better selection, better shopping experience, newer products — all of this comes into play whether real or perceived.”
On the Mainland, French of Mintel said it is unlikely that lower prices for luxury goods would be a new boon for luxury brands, or do that much to boost domestic consumption.
When the government “was talking about boosting domestic consumption, they were not talking about the middle class or the rich,” French said. “They are just thinking about the urban working poor. That will boost things like [sales of] toothpaste and soap and instant noodles, which will benefit Chinese companies.
“People who like luxury brands, they are either so rich they don’t care [about the tax], or they are secretaries wanting the dream, and they don’t care,” he added. “This is not going to bring tons and tons of people into the market. The truth is that the war has been won. The Chinese were offered overpriced handbags and they fell for it.”
Others say they see it differently.
“It will give average Chinese possibilities to access some affordable, upscale brands to improve their living conditions,” said Pierre Xiao Lu, author of “Luxury China: Market Opportunities and Potential” and marketing professor at Shanghai’s Fudan University. “It will help China form a more stable middle class.”
The biggest question yet to be answered is whether luxury brands will lower their prices enough to reach China’s middle class. Several different taxes, including VAT, consumption tax and import duties are imposed at different rates on different categories of luxury products. Not all of the taxes would necessarily be reduced, which means products will still be more expensive in China and luxury producers could still maintain high prices even with tax breaks in order to boost margins.
“This is one of the great unknowns,” French said. “If Louis Vuitton has a $1,500 bag and can say a chunk of that is tax, would that bag suddenly be $900? I don’t think so.”