China Announced Changes to Consumption Tax of Cosmetics from 1 October 2016

Tax Newsflash:October 2016/China

On 30 September 2016, China’s Ministry of Finance and the State Administration of Taxation issued a circular (Caishui [2016] No. 103 (Circular 103)) to remove consumption tax on non-luxury beauty and makeup products, and lower the consumption tax rate for taxable cosmetics to 15%. Circular 103 takes effect from 1 October 2016. (Tax Newsflash:October 2016/China)

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(1) Key changes

Taxable items – Non-luxury beauty and makeup products are no longer subject to consumption tax after 1 October 2016. Therefore, the name of the tax category is now changed from simply "Cosmetics" to "Luxury (high-end) Cosmetics," with the following items included into the taxable scope:

  • Luxury beauty and makeup products;
  • Luxury skincare products; and
  • Cosmetics in packaged sets.

"Luxury" cosmetics are defined based on the value thereof, specifically those with selling price upon production or import (dutiable value), exclusive of VAT, being RMB 10/ml (g) or RMB 15/piece or more.

Tax rate – The consumption tax rate for cosmetics is reduced from the previous 30% to 15%.

Import taxes – The Chinese government also announced a series of import tax regulations to implement the corresponding adjustments to import tax policies for cosmetics.

(2) Deloitte’s comments and recommendations

Consumption tax reform is one of the key tasks of the fiscal and tax reforms of China's thirteenth five-year plan. The changes of consumption tax policies to the cosmetics sector are not unexpected as the market has been speculating for a series of measures to reform the consumption tax for years. The adjustments reflect the government's intention to guide rational consumption.

It is expected that the government may introduce further changes of consumption tax policies in the future in terms of the scope of taxation, point of tax, tax rates, etc. In general, the major targets of consumption tax include high-energy-consuming goods, high pollution goods and some luxury goods.

Circular 103 will have a significant impact on the sector of cosmetics:

Beauty and makeup products – The costs of beauty and makeup products are expected to be significantly lowered, as non-luxury products are no longer subject to consumption tax, and the tax rate for luxury products is cut by half.

Skincare products – Although luxury skincare products remain in scope of consumption tax, previously many skincare products were not subject to consumption tax in practice due to the long absence of guidance on the determination of "luxury" skincare products. With the clarifications by Circular 103 on "luxury" cosmetics, the scope of taxable skincare products might be effectively expanded after the issuance of Circular 103.

>> Click for Japanese [2016年10月1日から化粧品に係る消費税の取扱いを変更]

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