China import policy revisions

3 December 2005

The world is still waiting with baited breath to see if China will revise their system of import taxes and VAT as it currently applies to raw hides and skins entering the country. The changes under discussion would have far reaching effects and even before final decisions have been made there is conjecture that the Chinese government may have to recind the new regulations in order to maintain the competitivity of their leather industry and protect their domestic job market. If enacted the new regulations concerning the import of raw hides and skins into China will require importers to pay 5% import duty plus 17% VAT up front from January 1. After re-export 13% VAT will be refunded. The present system allows for deferred VAT payment so nothing has to be paid when importing. The difference between 17% and 13% (4%) is only due upon re-export. Since there are many joint venture companies in China and many goods never actually leave the country, tax evasion is common so it is understandable that the government wish to tackle the situation. The new rules will demand a payment of 22% more cash on the day of importing the goods. There has been an import duty of 23% on raw, wet-blue, crust and finished leather in place for a long time. For those manufacturing leather for domestic consumption this is accepted and accounted for, although widespread evasion of tax is still suspected. The difficulties that will arise from the proposals, if they become law, is that those manufacturers who export their finished goods will then have to pay the taxes up front and may have to wait for months before they can reclaim their money back against their export credit As with civil services around the world, a swift and efficient turnround is highly unlikely and could cause great hardship to the companies caught up in the system. If China goes ahead and enacts to new law, proposed from January 1, 2006, Chinese imports of affected goods are expected to drop. It will also reduce the competitive nature of Chinese trading and lead to a loss of jobs. If these three factors are sufficiently serious, as observers in the west believe they may well prove to be, the Chinese government may well need to rethink their strategy. In the meantime, Chinese buying has already slackened, either due to the uncertainty regarding the legislation or in the run up to the Lunar New Year at the end of January which could see tanneries closed for as long as three weeks. There is also said to be increasing pressure from the Chinese.

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