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2019 Policy Updates – E-commerce Law of China

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Category: Economy & Trade, Tax and Regulations
E-Commerce Law China - SJ GRAND

A new law to regulate the online retail industry of China

2019 has brought big changes in Chinese laws and regulations. Most prolific of reglementary updates is, of course, is the new IIT law and the related updates it brings along, as we’ve already covered.

However, there is another novelty among the regulations, worthy of coverage, as it directly affects many businesses of modern day China. It’s the so-called e-commerce law, effective as of January 1, 2019. This is the first overarching law of China which attempts to regulate the country’s booming e-commerce industry.

Keep reading to learn more about the effects of this new law!

Read more about the changes in China’s IIT Law: China’s IIT Law Withholding Measures for 2019 Released

The struggles of the e-commerce sector

Chinese e-commerce has had a gust of controversy surrounding it from the outset. Crackdowns on counterfeit goods sold by independent vendors across Chinese e-commerce marketplaces, issues with the tax-avoidance of daigou and more. These were just some of the major affairs e-tailers were facing.

The problem of lax regulations regarding e-commerce was so evident, that Alibaba Group released a public appeal back in 2017. In the appeal, the company called for stricter laws, along with firmer enforcement and penalties on vendors of counterfeit goods. The notice criticized the lenient regulations, allowing criminals to continue with illegal activities without facing any severe consequences. The illegal vendors using Alibaba Group’s Taobao market as their platform have also smeared the tech-giant’s name. Due to counterfeit goods, the company has been consistently included on the Office of the United States Trade Representative’s “Special 301” Out-of-Cycle Review of Notorious Markets list.

Moreover, the daigou – traveling shopping agents who buy luxury goods from overseas for resale in China – had been receiving more and more attention from the officials. The issue with daigou? Not only do daigou sellers avoid paying taxes, but their business often also goes undocumented and is often trust-based. Whether luxury goods, food supplements or baby formulas, neither the shoppers or sellers possessed any rights with this purchase method. It’s not uncommon for daigou agents to cheat customers by selling them counterfeit products

New law to regulate e-commerce

The e-commerce law, which was first proposed in August of 2018, aims to „regulate e-commerce conduct” and „to promote the sustainable and healthy development of e-commerce “. Thus, it’s mainly seen as a positive development for the entire e-tailing sector.

The news are positive for luxury brands hoping to sell more of their pricy items. For example, the new law raises tax exemption limit for cross-border purchases. The limit of a single transaction will be increased from 2,000 yuan to 5,000 yuan. The annual purchase amount increasing from 20,000 yuan to 26,000 yuan. Cross-border purchases under new law will be exempt from duties and receive a 30% discount on consumption tax and VAT.

The fight on counterfeit merchandise is also more apparent, as all e-commerce operators must now be properly registered and licensed. Additionally, electronic payment methods, taxation and e-commerce dispute resolutions will be monitored more closely.

With a focus on consumer protection, the new law addresses the protection of intellectual property, data protection and cyber-security. The law also takes a stricter stance to fight false advertising.

For large operators, e.g. JD.com and Alibaba, the new regulations will be easy to comply with. However, smaller e-commerce platforms with fewer resources and assets, the rulings may be harder to follow and will thus be put at a disadvantage, directly influencing their growth in the domestic market. ‘

Who will be affected by the law?

The new law will be relevant to three types of operators. Large e-commerce platform operators, such as Taobao, also third-party traders mediating goods and services of others for a margin, and online vendors operating own websites or conducting business through other channels, such as social media websites.

The addition of e-commerce platforms, that are less-known and traditionally used, is a smart move to regulate merchants selling goods through WeChat’s Moments feed or through a video-sharing app Douyin (known in the West as TikTok). According to the law, these sellers will now have to file their business registration and pay all the required taxes.

Merchants to have more responsibilities

Previously, merchants were solely responsible when caught selling copycat merchandise. The new law places more liabilities on the e-commerce platforms, making them jointly responsible with merchants if these were to use the platform to sell any fake goods. Hence, if a platform operator is aware of IP rights being violated on the website yet fails to take any actions to prevent this from happening, they will also be considered an offender in such a situation. This leaves platform operators under more strain – the likes of Alibaba, JD.com and Pinduoduo must now diligently control the scope of online sales on their websites. Failing to do so can lead to a fine of up to 2 million yuan in more serious cases.

The operators are also obliged to keep transaction records of up to three years, along with information or services and products supplied.

Daigou getting creative to go around the new law

As the new law requires online sellers to disclose their business licenses, which forces the daigou, who operate in a gray area, to get creative with their approach. According to a post published on a popular WeChat-based blog InsDaily, titled as „First day of the new year – what happened to daigou?, the online sellers have figured out new ways to market their business. Allegedly, some of these cross-border shopping agents try to avoid getting their business detected by promoting their products via hand-drawn product photos, fake names, or by using foreign languages to introduce them, such as Japanese or Russian. Some try to hide their business by only communicating to their clients via voice messages.

It is unclear at this point how Tencent, the owner of WeChat, will regulate daigou activities on their platform. However, the company stated via Beijing Youth Daily that they have never encouraged any commercial activities via personal WeChat accounts. They have not implemented regulations against sales agents on WeChat yet.

What to expect next?

As the law has just recently been implemented, it’s too early to speak of its impact and efficiency.

While it is a huge step towards improving the IP protection issues China is so infamous for, the wording of the new law has been also described as vague, leaving a lot for open interpretation. In fact, The Diplomat claims the e-commerce law is a mere codification of an already existing law established by China’s courts. While establishing a set of laws and regulations, aiming to regulate the vast online retailing business and to protect the rights of consumers and intellectual property is a step in the right direction, there is clearly room for improvements. The future could see re-issuing the law with more specific guidelines on the expected consequences, especially for daigou. And while it initially may feel like a burden, the law also aims to extend some protection to domestic IP owners.

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