They own virtual stores but sell real goods, and earn real money. But they don't pay tax. China has more than 300,000 of them and their number is growing, especially in cities such as Beijing, Shanghai and Guangzhou. Their business model has one those fancy SMS-style names, too: C2C, or consumer-to-consumer. To get an idea of how big the business is one has to look at its last five years' figures: from 400 million yuan ($51.72 million) in 2001 to 23 billion yuan ($2.973 billion) in 2006.

Welcome to stores on the Net!

An advertisement for Taobao.com in Shanghai. The auction website is China's largest consumer-to-consumer market.

Miyo, a college student in Beijing, runs one such store. She launched it on auction website Taobao.com, China's largest C2C market, a year ago, and earns between 3,000 and 4,000 yuan a month. Why doesn't she at least get her store registered? Says Miyo: "If we have to register with the Industrial and Commercial Bureau and declare our incomes to the tax authorities, the procedure could be too troublesome. My store is not worth that big a trouble. I could even consider shutting it down in that case."

To be fair, not all the Net store-owners earn as much as Miyo. Some are in it just for fun, and make just a few bucks. But again, it's true that many earn a lot more than Miyo, and have turned the virtual stores into a permanent, lucrative business.

Such people should be taxed, we understand, but why aren't they? Because, says Chen Xuexi, "existing tax laws have not kept pace with the development of business on the Net". Chen is a deputy to the National People's Congress (NPC), China's top legislative body, from South China's Guangdong Province. He had proposed that tax be levied on online business and a law on e-commerce tax enacted.

But on March 6 when the Ministry of Commerce (MOFCOM) issued its provisional guidelines on Net transactions, they didn't have any tax rules on Net business. That has left a kind of void, which can only be filled if China revises its tax system to adapt to the digital economy, Chen says.

"If a vendor sells full-time online and earns a profit, it should be treated as a business, and he or she should be taxed," says MOC official Yan An, who was part of the team that drafted the provisional guidelines. "But the government needs time before it can enact a law on C2C business," she says.

In fact, the State Taxation Administration (SAT) plans to tax Net sales, says an official. But it has not yet released a timetable.

Some provincial governments, however, have already reacted to the rising business on the Net. East China's Jiangxi Province, for instance, has a regulation making it mandatory for Net stores to get a license. The move is aimed at having all necessary information on such stores ready so that they can be taxed once a law is enacted.

Such a day may still be far, for a debate is raging now over whether online business should be taxed and if yes, when? The anti-tax lobby, which obviously includes the auction websites and most of their online vendors, wants the government to declare the Net a tax-free zone. If the government doesn't do that, then at least it should declare a moratorium on Net taxation, they say.

"Taxing Net sales will harm the growth of e-commerce and have a negative impact on the economy. Net stores have created many jobs, helping the overall economy," says Taobao public relations manager Lu Weixing. "Taobao has set a goal for itself: of creating 1 million jobs. The benefits of C2C business to society can be much greater than the government's income from tax." Incidentally, Taobao's Net store business has increased 110 percent in the last five years.

Others in the group argue that the industry is too young to withstand the "blow" of additional costs. "The competitive edge of the Net stores lies in the cheaper prices they offer," says an online retailer surnamed Li. "We'll loose this advantage if a tax is levied because no customer will want to shop online because it's more troublesome and risky to do so."

Industry analysts have a different take on the subject. They, in fact, want the government to encourage the flow of capital into e-commerce. "Most of the online vendors are from the low-income group," Chinese Academy of Science professor Lu Benfu says. "The well-off and the rich are usually not ready to toil for a living, especially by selling widgets online? If running a Net shop can help such people get a job, it's good for society."

Most of the products sold in the C2C market are second-hand household items, Lu says, which means it's helping build a resources-saving society.

But vendors with real stores fear that they could soon be driven out of business by their dotcom counterparts. "Consumers will shun the streets for the PCs because Net stores can sell the same goods at lower prices," says a woman surnamed Zhang, who owns a garment store in Beijing's Hepingjie Street.

There's another twist to the Net sales tale. Smart real vendors are going virtual with their sales. So they don't have to pay taxes on business transacted online.

Still, there are some Net vendors who favour registration. Says one online cosmetic vendor: "Registration will accord the online shops official status and prohibit unscrupulous vendors from misusing the Net." Those who have payment security and product quality as their top priority support such a move.

Attorney and partner with Deheng Law Office Kevin Shien wants Net sales to be taxed, but not now. "We should answer two questions: whether to impose tax; and when? As long as Net stores run a business, they have to pay tax; regardless of whether they're making a few or thousands of bucks."

Shien concedes, though, that the C2C business model is still in its nascent stage and that the government may want to wait till it matures. Actually, he hopes the government would nurture it through a favorable tax policy.

Lobbies for and against both; it seems; have a point. Encouraging small, but genuine, vendors is important for more reasons than one. But it's equally important to protect the rights of the consumer. So what's the verdict, tax or no tax? The authorities are the best judge!

(China Daily 04/11/2007 page12)