On 30 September, 2016, China’s Ministry of Finance and State Administration of Taxation announced a revision on the consumption tax for imported cosmetics items. Effective from 1 October, 2016, consumption tax rate for cosmetics items is lowered to 15% from previous 30%. Major changes on the consumption tax for general cosmetics and upscale cosmetics items are set out as follows:

Consumption tax on general cosmetics (with imported/ex-factory price at less than 10 yuan /ml or 15 yuan/unit) will be removed.

Consumption tax on upscale cosmetics (with imported/ex-factory price no less than 10 yuan /ml or 15 yuan/unit) will be cut from 30% to 15%. Upscale cosmetics include high-end color make-up, beauty products, premium skincare and packaged cosmetics products.

Implications

1. A favorable sign for foreign cosmetics brands
   The reduced tax rate implies a lower imported cost for foreign brands. It provides room for imported brands to lower their local retail price, making their price more competitive and increasing their appeal to local consumers.
2. Negative to domestic brands
   Local brands generally have the edge over foreign brands on competitive pricing. However, as foreign brands are likely to cut retail price upon the tax revision, competition in the cosmetics market may become more ferocious. Therefore, local brands have to evaluate their pricing strategy and to optimize their product differentiation in a bid to maintain their competitiveness.
3. Reducing arbitrage opportunity of the grey channels
   Price gap between buying the same overseas products in foreign countries and in China onshore will narrow. This may reduce arbitrage opportunity of the grey channels.
4. Tax adjustment may motivate more consumers to buy high-end overseas products in China.
5. Impact on cross-border e-commerce (CBEC) may be negative
   Some overseas brands may turn to enter China via general trade instead of CBEC. To recap, when overseas cosmetics products enter the China market via CBEC, by 11 May 2017, all first-time imported products will need a pre-market approval according to the Supervision of Hygiene of Cosmetics Regulation. This requirement used to only cover normal trade, has extended to CBEC imported cosmetics according to the new regulations on CBEC released on 13 April, 2016. Overseas cosmetics brands may not be able to enter the China market as easy as before via CBEC channels.