You will soon pay more, and the correct tax, for orders from Shein and Temu

Consumers will pay more, and the correct tax, on orders from Shein and Temu from 1 July as the tax man cracks down on these fashion giants. This is after Sars indicated that it will require the customers of both companies to pay standard import taxes on goods under R500.

Local retailers as well as other stakeholders in the textile industry have been complaining that Shien and Temu are exploiting a tax loophole in South African tax law to keep their import prices low.  The so-called de minimis rule allowed parcels containing clothing under R500 from these companies through customs paying only 20% import duty and no VAT.

However, local retailers always had to pay 45% customs duty as well as 15% VAT for imported clothes. From 1 July, an item that costs R120 on Shein or Temu will cost R166.

Yda van Gass, chief executive of planning at Ackermans, says these two online retailers have a huge impact on local retail.

“Globally they own nearly a fifth of the fast fashion apparel industry. In South Africa, we have seen them moving up in market share significantly over the past three to four years, with some market researchers claiming that they own 7% of local market share.”

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Difficult to know how much Shein and Temu sell

Unfortunately, Van Gass says, there is very little confirmation of these numbers as Shien and Temu are not members of the Retailer’s Liaison Committee (RLC) where retailers can see how they gain, maintain or lose market share in South Africa.

“This makes it very difficult to know how much money South Africans currently spend on these sites. We have seen a massive increase in social media content with hashtags like #Shienhaul delivering 4.8 billion views on TikTok and this does create confidence with the consumer that they can take the risk to buy items from these retailers.”

She says early in the rise of Shein and Temu consumers had their doubts about quality, fit and expectations compared to what they viewed and what their taxes would be if they buy from these retailers who offered items much cheaper. With these social media posts, they have overcome this challenge quite successfully.”

Why were Shein and Temu allowed to get away with exploiting a tax loop hole for so long, when delivering a higher volume of low cost orders? Van Gass says she cannot comment on this tax loop hole, but what they do know is that Shein and Temu deliver by air freight, which is very expensive and local retails cannot afford this on a regular basis, while also doing this with very small orders in very high volumes across the globe.

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Local retailers hope new tax rules will be enforced

Local retailers really hope that the new tax rules will be enforced and that local consumers will buy local again, she says. “With South African consumers under tremendous economic pressure and retailers faced with many macro events the past four years, it is quite a challenge to still grow the market for apparel, footwear and home.

“Retailers had to face challenges such as Covid, the KwaZulu Natal looting, followed by the flooding in the same region the following year, continued pressure with load shedding and ineffective ports that drive unnecessary costs and lead times.”

Therefore, local retailers find it a challenge to make the financial numbers work by delivering continuous profit growth other than trying to steal market share from your competitors, she says. “If you are suddenly competing with competitors who can play by a different rule book, it brings new challenges to overcome.”

Van Gass says South African retailers are also encouraged to source more products locally or from SADEC countries to drive more opportunities for job creation. “With this initiative, it is impossible to compete with the likes of Shein and Temu that produce small amounts in factories with far cheaper raw material and labour.

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Shein and Temu have a different business model

“Their total business model is set up differently to traditional retail, as they have no bricks and mortar stores, but have a massive marketing budget to drive consumer consideration worldwide which gets supported by clever AI to give intel on consumer considerations while all they do is a lot of quick product testing which can be rolled out in volume to drive economies of scale.”  

She says retailers have put pressure on government to regulate companies such as Shein and Temu a lot better and have asked that they pay the same duties local retailers must to ensure that the playing field can be levelled. “We are very happy with the most recent changes deployed on taxing of the smaller parcels.”

 Will the new taxes have a positive impact on consumers’ shopping behaviour locally? Van Gass says they hope it will Many consumers are now hesitant to spend with this increase on the tax they have to pay. This big unknown might be a hinderance and risk they are not willing to take.

“We believe that there are still consumers out there who value a brand like Ackermans that delivers good, trusted quality. Customers can feel and examine the product before they buy.”