China’s New E-Commerce Law: Bad for Daigou, Good for Cross-Border E-Commerce?

Date:2018-09-28 by Azoya Consulting

On August 31st, the Chinese government passed a comprehensive e-commerce law that will come into effect on January 1st, 2019.

In line with the growing e-commerce industry, the government has recognized that more regulation is needed to protect consumer rights and level the playing field for both large and small players in the industry.

The law specifically regulates the conduct of three groups: platform operators (Taobao, Pinduoduo, JD, etc.), in-platform operators (those that operate shops on platforms), and any other types of e-commerce businesses (including WeChat stores, standalone e-commerce sites, etc.)

These businesses will face increased scrutiny, paperwork, and, in the case of large platforms, have to step up their own internal procedures for protecting product authenticity and IP rights.

Mom-and-pop sellers on WeChat and Taobao may be forced to register and pay income taxes for the first time, putting them on par with local brick-and-mortar retail stores.

These sellers include gray-market daigou agents who buy international brands overseas and re-sell them in China, profiting off of the mark-up.

Because of the new taxes, these sellers may have to raise their prices or exit the market altogether.

This may drive daigou customers to cross-border e-commerce sales channels instead. Cross-border e-commerce involves the direct selling of overseas products from brand/retailer to Chinese consumer.

Here’s our wrap-up of the new law below:

Some Key Points

1. E-commerce platforms will, in part, shoulder the responsibility for the sale of counterfeit items and have to set up systems to protect intellectual property. (Articles 41-45)

In the past, only sellers were responsible for the authenticity of the items they sold.

Now, e-commerce platforms have to establish rules to protect IP rights, and may be fined anywhere from 500,000 RMB to 2 million RMB for failing to respond to claims of counterfeit items.

This will put more pressure on marketplace platforms such as Taobao and Pinduoduo, who will have to employ more personnel to investigate claims of counterfeit goods and vet third-party sellers.

2. Platforms have to do more to protect consumers from fake reviews. (Articles 17, 40, 59)

Not only does this include fake reviews by third-party agencies, but it also affects reviews written by real customers.

This is because sometimes third-party sellers offer compensation of 2-5 RMB to customers in exchange for positive reviews.

Going forward, e-commerce platforms must set up straightforward, effective complaint and reporting procedures, and handle complaints in a timely manner.

3. E-commerce platforms will be prohibited from excluding or restricting competition, and cannot impose unreasonable restrictions, conditions, or fees on merchants. (Articles 22, 35)

This is designed to level the playing ground between smaller e-commerce players and larger platforms such as Tmall and JD.com.

As more and more merchants apply to sell on large platforms, it is natural for such platforms to raise the bar for entry.

However, it remains to be seen how platforms will respond.

They may face fines of 500,000-2 million RMB if this clause is violated.

4. Individual-run online stores may have to obtain a business license to operate. (Articles 2, 10, 12, 26)

Currently, on Taobao, sellers are divided into individual selling accounts and business seller accounts.

The new law means that individual selling accounts on platforms such as Taobao and WeChat may have to register with the State Administration for Industry and Commerce to receive this license.

More scrutiny will be placed on them as the government strives to protect consumers from counterfeiters and fraud.

5. Such individual-run online stores will also have to file tax returns (Articles 11, 14, 27-28)

Now individual-run stores on WeChat and Taobao will have to file tax returns and issue “fapiao”, or official tax receipts.

To enforce this clause, platforms such as Taobao and perhaps WeChat will have to verify business licenses, conduct identity checks on sellers, and submit both identification and tax information to tax authorities.

Compliance costs and additional taxes may be passed on to consumers, putting online sellers on a more even playing field with offline retail players.

However, it remains to be seen how much in taxes sellers will have to pay.