Chinese e-commerce shop owners reliant on “order brushing,” a practice of falsifying sales numbers, may now be required to pay taxes based on the inflated figures with the implementation of a new tax law.
Why it matters: The new rule is likely to bring more order to the industry over the long term, but an immediate implementation could deal a heavy blow to small online merchants, many of whom are struggling to recover from the impact of Covid-19.
- Wider application of big data technologies has brought more transparency to the e-commerce market, enabling taxation regulators to compare their data with that from the e-commerce platforms.
Details: Chinese taxation authorities began sending alerts in late May to merchants on various e-commerce platforms like Tmall and JD.com, warning about risks of unpaid taxes from 2017 to 2019, local media reported.
- The first group of nearly 2,000 merchants in Beijing were warned of such irregularities and were required to make a supplementary payment based on the inflated numbers by early June.
- “Big data analysis and comparison show that the company’s sales revenue reported to tax regulators in 2017 to 2019 is quite different from the sales revenue calculated by the e-commerce platforms,” the notice warned.
- The firm involved is required to conduct a self-examination and pay the taxes and late fees if necessary, according to the notice.
- If implemented, the taxes could have heavy consequences for merchants that have engaged in the practice.
- A merchant who has inflated RMB 10 million in sales would have to pay more than RMB 1 million (around $140,000) in taxes, Xu Yafeng, founder of skincare brand MIyouth Fullness, wrote in a Weibo post.
Context: In an attempt to better regulate the industry, China’s E-commerce Law in 2019 made order “brushing” illegal, along with a number of other unscrupulous practices like rewarding positive consumer reviews with money.
- Order brushing, in which sellers use fake accounts to “buy” their own products and boost sales numbers, is a common scam that online sellers use to boost their ratings on various platforms.
- Merchants sent empty packages as part of order-brushing.