From Corporation Page 29 Issue 378 July 28 2008
Translated by Liu Peng
Original article: [Chinese]

From August 1, profit-oriented, Beijing-based online communities hosted on Chinese e-commerce websites must be registered and obtained a business permit from the City's industry watchdog.

In a circular issued by the Beijing Administration for Industry and Commerce (BAIC) earlier this month, the authorities termed the move as Guidelines to Strengthen E-commerce Supervision and Management.

The EO has learned that the Guidelines targeted online-store owners and sellers who conducted transactions over customer-to-customer (C2C) platforms, such as Taobao, Eachnet and Paipai - all popular e-commerce communities in China.

Previously, as long as online-store owners or interested sellers signed up with their identity card number and furnished banking account to the operators of C2C e-commerce platforms, they could straightaway launch into doing business, selling or auctioning off their pocessions.

Following the Guidline
The days of ease in conducting e-transactions are numbered with the introduction of the Guidelines, which has created waves of debates among Chinese netizens who criticized authorities for failing to consult public opinion through policy hearings prior to its implementation.

One of the fiercest critics was Lu Bowang, a senior internet analyst, who claimed the ruling would be the death knell of C2C business in China.

Another critic, China Electronic Commerce Association council member Zhao Tingchao held the view that the Guidelines would not work, as they lacked details and an implementation framework.

Among the contentious points raised by the majority of net users were: How could the authorties ascertain the locality of online-store owners? What was the definition of "Beijing-based"? How could one differentiate the nature of online transactions as profit-oriented or non-commecial exchanges between willing parties?

However, one official from the news department of BAIC said the Guidelines "would come in force first, and the details would follow".

Another official, the BAIC's special transaction division chief Wang Jing, explained that "Beijing-based operations" meant business behaviour originated from Beijing.

On queries that Beijing-based operators might try every possible means to conceal their point of origin, Wang responded that the authorities would apply the "principal of presumption of innocence" when dealing with such cases.

As for how to draw the line between profit-oriented and non-commercial transactions, Wang said that depended on agreements sealed between the parties involved, and that identification initiatives would be left to the market.

The "leniency" expressed by BAIC officials further confused online traders. One online-store owner Zhu Zi asked: "If we held a different perception of the nature of our transactions from the BAIC, whom or which agency do we turn to state our grounds?"

One of China's largest C2C platform, Taobao (taobao.com), had already assigned personnel to follow-up on the issue. A source from Taobao said: "Without the details, we cannot start formulating counter-measures. As the BAIC remains fuzzy over the Guidelines' exact implementation, we can only wait and see what happens next."

Lawyer Yu Guofu from Sam & Partners said: "The Guidelines can only serve as a guiding principle for enforcement agencies under BAIC's jurisdiction. The circular has no legal authority in ordering online entities to register for a business license." He stressed that online businesses were governed by the country's existing laws on industry and commercial management.

Sourcing for Taxes?
Imposing taxation was believed to be the ultimate motive behind the Beijing authorities' introduction of business permits for online-stores. The EO learned that the State Administration of Taxation had started researching into taxy levy problems issues in e-commerce.

Hu Bo, co-partner of Shanghai-based LSC accounting firm, pointed out that under normal circumstances, a market entity was required to apply for a business license first prior to operating.

He added that within one month of operation, the entity must register with the taxation authority, and that individual-owned businesses were levied a 4% value-added tax.

However, many online businesses were not confined to one locality or had a physical base, posing challenges for business permit management and tax collection.

State Administration for Industry and Commerce (SAIC) chief Zhou Bohua had once told the media that Beijing would start a pilot project in issuing business permits to online-stores, and that such measures would be expanded nationwide in time to come.

An official from SAIC's propaganda unit told the EO: "The State Council has ordered us implement effective supervision and management of e-commerce, and we are formulating relevant regulations to test the waters first in Beijing."

At present, the volume of online shopping only took up 0.63% of the Chinese retail market's overall turnover, while e-shopping amouted to some 3% in the European and US retail markets, according to open data.

"In the long run, it is necessary for the government to standardize regulations for e-commerce, but it is a question of timing," said Taobao spokesperson Lu Weixing.

The stand taken by another e-commerce player, Paipai (paipai.com), was that China's C2C e-trading was still at an infant stage, and it believed a more relaxed regulatory environment would help to nurture and boost such commercial activities.

On the impact of the Guidelines, a spokesperson from Eachnet (eachnet.com) said in the short run, it would raise the threshold of entering online trade, possibly forcing some under-par store owners out of the market.

In the long run, however,  he believed more stringent regulations would enhance the credibility of sellers and buyers' faith in online shopping, thus promoting China's e-commerce toward a more mature stage of development.

Given that the e-commerce industry was still nascent, the BAIC had openly announced that tax collection matters could be put aside "temporarily", but related tax policies might be introduced in the future.

If business registration and taxation issue were enforced strictly, some market analysts projected that at least 50,000 online-store owners currently existed in Taobao would be forced to withdraw, while the growth rate of newly open stores would drop.

"When registering for a business permit, a store owner needs to provide a business operation address, if the address is based in residential area, the application would need the approval of neighbors and the residents' committee.

"In addition, when operating with a business permit, does that imply that the store owner would have to start paying commercial rates for water and electricity consumption?" said an analyst Yang Jie.