China's luxury goods market, already the world's third largest, is expected to grow by 20 percent annually in the next three years, according to a report by international auditors, Ernst & Young, released on September 14.

 

According to the report, sales volume of luxury goods will top US$11.5 billion by 2015, making China the second largest luxury goods market after Japan.

 

At present, China has about 10 to 13 million active luxury goods buyers with an average annual income of 240,000 yuan (US$29,669) per person.

 

China's booming economy coupled with a growing urban population and more mature and discerning consumers has led to a larger appetite for luxury goods, according to Conway Lee from Ernst & Young China's Retail and Consumer Products department.

 

However, consumption tax collection on luxury goods has not risen in tandem with their popularity.

 

China first levied consumption taxes on goods in 1994. Eleven categories of goods are subject to consumption tax including cigarettes, alcohol, cosmetics, skin-care and hair-care products, jewelry, firecrackers, gasoline, diesel, automobile tires, motorcycles and compact cars. The tax rates range between 3 percent and 45 percent. These goods are described as being high-grade or luxury goods, goods made of exhaustible resources, or goods that are not conducive to human health or social ecology.

 

In China, the tax is levied on goods produced in the country, which includes consigned processing, production and import, a cost that is more often than not passed on to the consumer in terms of higher retail prices. Some countries levy their taxes on the process of circulation.

 

Luxury brands such as Prada, Cartier and Louis Vuitton therefore only have retail outlets and not manufacturing bases here, thereby circumventing the tax rule. This gives them the leeway to price their goods at levels that ensure they make a healthy profit, while at the same time keep their customers happy. 

 

This rule has led to something of an irony: Consumers have to pay consumption tax on daily essentials like soap and shampoo but not on luxury goods like a private yacht.

 

Yang Zhiqing, vice director of the Financial Taxation Research Institute of the Central University of Finance and Economics, said: "China's economy has developed rapidly and so have personal incomes, which has changed consumption structures and levels. Unfortunately, the decade-old consumption tax has failed to keep pace with the socio-economic changes."

 

According to Yang, the tax rule as it stands today, covering only 11 categories of goods, no longer plays an effective role in adjusting production, steering consumption and distributing incomes.

 

Cosmetics, for example, might have been a luxury item 10 years ago, but not today. 

 

In Yang's opinion, high-grade consumption goods such as golf clubs, fur products, yachts, luxury cars, top-grade home appliances and products that are made of resources which are hard to renew and that pollute the environment, such as mercury batteries and solid wood floors should all be levied with consumption tax. The consumption tax on commodities that have become everyday essentials such as shampoo and moisturizers should be lifted.

 

Xiao Zhuoji, a professor with the College of Economics at Peking University, also suggested levying a special consumption tax on certain luxury goods.

 

"We cannot limit consumption, but we can help narrow the gap between the rich and the poor through the consumption tax," Xiao said, adding: "Rates of taxation to be decided by tax departments."

 

The State Administration of Taxation is currently considering a proposal to revise the categories of goods subject to consumption tax, which was first put forward three years ago.

 

One difficulty lawmakers face, however, is defining a luxury item, which is dependent on socio-economic circumstances, according to a staff member from the consumption tax department of the State Administration of Taxation.

 

(China.org.cn by Yuan Fang, September 29, 2005)