How VAT on cheap imported goods adds up
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How VAT on cheap imported goods adds up

EXPLAINER: The Customs Department will begin collecting VAT this month on all goods arriving in the country via postal services

According to Mr Theeraj, e-commerce trade expanded significantly during the pandemic compared with the period before the emergence of Covid-19, especially for low-priced imported goods from China transported overland to Thailand.
According to Mr Theeraj, e-commerce trade expanded significantly during the pandemic compared with the period before the emergence of Covid-19, especially for low-priced imported goods from China transported overland to Thailand.

Thailand has embraced the digital economy, with trade on foreign online platforms increasing rapidly, disrupting domestic entrepreneurs.

Local businesses are struggling to compete on price, resulting in some fading away. The government was pushed to act by domestic entrepreneurs as cheap Chinese products flooded the market.

Imported goods sold for less than 1,500 baht per package were previously exempt from value-added tax (VAT) and import duties.

Online platforms selling goods from China import a large quantity of low-priced goods in containers, each containing tens of thousands of items.

This poses a significant challenge and it would require a considerable amount of time if each box had to be opened in order to assess the correct rates of tax, as proposed by the Finance Ministry.

This unfair competition prompted the Finance Ministry to recently rule to cancel the value-added tax exemption for low-priced goods.

Starting in May, the Customs Department is collecting VAT for imported goods sent via postal services, regardless of the value of the goods.

Q: Is the practice of exempting tax levies for low-priced goods accepted globally?

According to Theeraj Athanavanich, director-general of the Customs Department, exempting taxes for low-priced goods is a principle adopted by many countries, as they perceive that the importation of low-priced goods from other countries by individuals in the country is unlikely to be carried out for commercial purposes. Therefore, taxes are exempted for low-priced goods, with each country setting different thresholds concerning the value of the goods.

In the case of the US, the country set its threshold for imported low-priced goods at no more than 20,000 baht per item, while Thailand has deemed that low-priced goods are those valued at no more than 1,500 baht per item. The exemption threshold depends on the economic conditions of each country.

E-commerce now plays a significant role in both domestic and international trade. Purchasing a single item such as a shirt from overseas has become increasingly accessible. In the past, such a purchase was difficult due to the high costs involved or a lack of economy of scale.

This type of trade is now impacting domestic businesses, creating unfair competition or a lack of a level playing field because these exempted goods face no tax burden.

Consequently, many countries are starting to impose taxes on low-priced goods, such as Australia, while the US is also considering implementing similar taxes.

Q: How will the VAT collection operate?

According to Mr Theeraj, the department will allow platforms to declare the price of the imported product and deduct the VAT from that price, then send the tax payment to the Customs Department.

The department already collects VAT for goods valued at more than 1,500 baht apiece.

For individuals who import such goods from abroad and have them sent via a postal service, the Customs Department already has a tax collection system in place.

A tax notification is sent to the recipient's address, stating the tax obligation. The recipient must then make the tax payment to the department before collecting the goods from the post office.

According to Mr Theeraj, during the Covid-19 pandemic, e-commerce trade expanded significantly compared to the years before the pandemic, especially for low-priced imported goods from China transported by trucks.

The statistics for express imported goods (parcel express) -- exempted from tax since 2021 -- imported through Suvarnabhumi Airport Customs Office and Mukdahan and Nakhon Phanom Customs Offices combined, amounted to 40.8 million packages worth 9.84 billion baht.

In 2022, the number increased to 47.1 million packages worth 11.6 billion baht, and the latest data for 2023 reveals an increase to 56.8 million packages worth 17.9 billion baht.

Regarding imports via postal services (all dispatched via Laksi mail centre), there were 4.09 million packages worth 1.14 billion baht in 2021, with the number decreasing to 2.91 million packages worth 895 billion baht in 2022, and further decreasing to 2.11 million packages worth 676 billion baht in 2023.

Mr Theeraj insisted the purpose of the VAT collection is not to increase tax revenue for the government, but rather to promote fairness between domestic and foreign businesses.

Q: Will collecting VAT from cheap imports sent via the postal system level the playing field?

Paul Srivorakul, group chief executive of aCommerce, a leading e-commerce enabler, said the VAT collection ensures that all goods, regardless of origin, are subject to the same tax standards, thus levelling the playing field for local products and domestic businesses. This should also increase government revenue through both import duties and VAT.

However, enforcing the new duties on lower-value goods might introduce complexity in customs processes, potentially slowing down the importation of goods and impacting businesses reliant on imported products, he added.

The e-commerce sector, especially the marketplaces, which benefits significantly from the sales of imported low-value goods may face an impact from the VAT collection on cheap imported goods.

However, the benefits to local SMEs and the Thai economy far outweigh the impact on Chinese e-commerce platforms.

Mr Paul added that Thailand also needs a simplified tax structure, possibly a flat-rate tax model for low-value imports to ease the administrative burden on customs and businesses.

Alessandro Piscini, the founder of CREA, a leading e-commerce enabler, said the tax collection would reduce the gap between local SMEs and Chinese players regarding cross-border products, but he noted that the large China-based factories would most likely continue to have a cost advantage.

Kulthirath Pakawachkrilers, president of the Thai e-Commerce Association, said Thai entrepreneurs who do not import from China should feel better about the issuance of this tax measure. From the perspective of Thai entrepreneurs who trade with China, they should see the tax as an increase in costs.

Ms Kulthirath said that by implementing this VAT policy, related ministries and state agencies should examine the related agreements between Thailand and China as the policy could have some impacts that might affect their bilateral relations.

Q: Is the measure likely to be effective?

Aat Pisanwanich, an independent analyst on international trade, said imposing the 7% VAT on cheap imported goods, mostly from China, might not deter the influx of products because their production costs are significantly lower.

Even with the additional 7% tax, Chinese goods remain cheaper than similar goods produced in Thailand.

According to Mr Aat, relying solely on tax measures is not the ultimate solution to protect domestic producers. It is necessary to complement tax measures with other actions, such as controlling the standards of imported goods to ensure they meet domestic standards or have good agricultural practices (GAP) standards, among others.

He cited Indonesia as a good example of using measures to protect domestic businesses. For instance, if goods are imported at a lower price than domestically produced goods of the same type, a tax must be levied on those imported goods to ensure their selling price is equivalent to domestically produced goods.

At the same time, measures have been taken to prohibit the sale of low-priced goods worth less than 3,500 baht on online platforms. The steps taken in Indonesia have helped reduce the trade deficit with China, whereas Thailand faces the largest trade deficit with China, amounting to 1 trillion baht a year.

He noted that Thailand's significant consideration towards China may be due to various factors, including the country's heavy reliance on China, be it exports, investment inflows, or tourists.

Q: What is the outlook for industries affected by the flood of cheap Chinese goods?

Mr Aat said many industries are being affected by the influx of Chinese goods, particularly the steel industry. Instead of importing steel from China for sale in Thailand, Chinese entrepreneurs are now establishing steel production plants within Thailand by importing raw materials and machinery from China.

The production capacity of a single Chinese-owned steel plant now equals that of all Thai steel producers combined.

Furthermore, they can sell their steel at a lower price. As a result, Thai-owned steel plants currently operate at only 30% capacity because they cannot compete with the prices of Chinese steel. The steel industry serves as a reflection of the broader impact of the inundation of cheap Chinese goods on Thai industries.

He proposed Thailand establish conditions for foreign investment in the way that Indonesia has, which mandates a local content requirement for foreign direct investment.

Mr Aat said if Thailand doesn't implement any additional measures to help Thai entrepreneurs, it is believed that in no more than five years from now, Thai entrepreneurs will completely vanish.

He referred to the situation in which China evidently dominates businesses in Thailand. For example, Chinese traders already control around 70% of fruit sales in Thailand.

If Chinese traders gain complete control over fruit farms in Thailand, Thai traders are unlikely to be able to survive. In fact, he noted that Thai traders are merely the Chinese traders' stooges.

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