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  Shanghai & Delta
  Shanghai - Star
Businesses, consumers feel pinch of tax hike
Sales of luxury cars soar; some think higher levies on cosmetics, watches could drive buyers to HK

Xu Xiaomin and Wang Xu
page01  2006-3-24

For Fang Yi, the adjustment of the nation's consumption tax, which is scheduled to go into effect April 1, is not a series of abstract legal terms picked from out of the air, but a costly 420,000-yuan (US$52,000) issue that really matters.

The Lamborghini Fang ordered was priced at 3.5 million yuan (US$432,000) last November. But Fang will have to pay an extra 420,000 yuan, when the Italian sports car is delivered this June.

Fang, a real estate developer, is not the only one who already feels the heat of the tax changes. Car dealers, luxury watch sellers, even wood flooring makers are busy working out their new price tags while wondering how the tax increase will impact their business.

Starting April 1, the Ministry of Finance will levy consumption taxes on throw-away wooden chopsticks and wood flooring. The ministry also will raise taxes on goods ranging from yachts to gasoline and certain cars, in a bid to protect the environment and conserve energy.

The automobile sector will see the most significant adjustments. For vehicles with engines larger than four litres, most of which are imported luxury sedans and sport utility vehicles, the tax will jump to 20 per cent from the current 8 per cent for sedans and 5 per cent for sport utility vehicles.

Local car dealers have already felt the impact of the new policy as car buyers rushed to outlets, hoping to make their purchases before the tax is levied.

"We sold more than 20 Volvos on Wednesday and Thursday, almost the monthly sales volume last year," said Wang Hongyu, assistant general manager of Shanghai World Trade Automobile Co Ltd, one of the largest local car dealers.

The impact of the tax adjustment on auto sales will be limited, since only a small number of vehicles sold in China qualify for the 20-per-cent tax, analysts said. The total number of autos with an engine size over four litres sold in 2005 was around 15,000, while 5.76 million new cars, trucks and commercial vehicles were sold during the same period.

"The tax may persuade car buyers to choose vehicles with smaller engine sizes, which will enjoy a tax reduction beginning in April," said Wang.

The tax on cars with engines of between 1 litre and 1.5 litres will drop from 5 per cent to 3 per cent, as the central government steps up efforts to promote fuel efficiency and lower energy use.

Sales of fuel-efficient cars have been climbing since last December, when it was first reported that heavier taxes would be introduced for fuel-guzzling cars.

Chery Automobile Co Ltd, an automaker based in East China's Anhui Province, reported sales of its QQ subcompact skyrocketing to 10,020, more than double the sales for the same period last year.

Besides the auto sector, the consumption tax was slapped on luxury products such as golf balls and equipment, yachts and high-end cosmetics.

Amy Chen, a marketing manager for Swiss watch maker Movado, said she is worried that the new policy will push more Chinese consumers to overseas markets such as Hong Kong.

According to the policy, high-end watches which sell for more than 10,000 yuan (US$1,200) will carry a 20 per cent tax.

"Some luxury watches sold at Bund 18 cost more than 500,000 yuan (US$62,000). With the tax increases, how much more would one pay?" Chen said.

Real estate developer Fang, who owns more than 10 luxury cars in China, said he would not buy a watch on the Chinese mainland after the tax adjustment.

"The tax contained in a luxury watch will cover the cost of several round trip tickets and luxury hotel stays in Hong Kong," he said. "We business people visit Hong Kong frequently, so why not purchase a watch there."

Meanwhile, makers of skin-care products also worry about the future.

According to the new policy, high-end skin-care products move to the category of cosmetics. The tax on these products will go from 8 to 30 per cent.

"The problem is how to define high-end skin-care products, according to price, brand or production location," said Wang Xingrong, spokeswoman of Estee Lauder Companies China, which has several upmarket brands such as Estee Lauder, Clinique and LaMer.

"If these products are moved to the high-tax category, it will affect sales to some extent," Wang said.

"The tax adjustment will affect some luxury products," said Zhang Jun, professor and director of China Centre for Economics Studies at Fudan University.

"For watches and cosmetics, it is very possible consumers will turn to Hong Kong, where prices were lower than those on the mainland even before the tax adjustment. But if consumption rises in Hong Kong, the Hong Kong market will reflect the change, for example, by raising the price. It is a rule of business," Zhang said.

But other luxury goods like golfing equipment, a new item on the tax list, may not lose customers, the professor said.

"Golfers who use public money for business reasons, or very rich people, won't care about the price change," Zhang said.

"Generally speaking, the tax adjustment will have no obvious negative effect on consumption. It may produce some effect in the short term. But after three to five years, consumers will be used to living in a new tax system and make more rational decisions."

When China undertook tax reform in 1994, there were 11 kinds of products subject to consumption tax. But things have changed considerably after 12 years.

China now is the world's third luxury goods consumer to the tune of more than US$2 billion in sales annually, according to a report released by Ernst & Young China last year. That explains why the central government increased the consumption tax and broadened the scope of goods affected to 14. Watches, golf equipment and yachts are the new luxury items.

But upmarket apartments, garments and furniture are not on the list.

Some experts said the current adjustment is just a start. Gao Huiqing, an official with the State Information Centre told International Finance News that the state will continue the tax adjustments.
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