SARS cracks down on Temu and Shein

After taking advantage of a tax loophole in South Africa, SARS has cracked down on Temu and Shein by increasing the amount that customers need to pay these discount retailers.

This was explained by Nedbank, which noted that South Africa’s online retail market has become increasingly popular and competitive in the past few years. 

A recent industry study estimated South Africa’s online retail sector at R71 billion in 2023, a 29% year-on-year increase.

The country’s largest retailers, like Checkers and Woolworths, have noted this trend and expanded their online offerings accordingly. 

However, there has also been an influx of international discount retailers vying for their share of South Africa’s online retail market.

“Chinese online retailers Shein and Temu are among the more recent entrants to the South African online market, grabbing market share and increasing pricing pressure on local retailers,” Nedbank explained.  

“Shein became a dominant brand after its 2020 launch in SA, where it was the most downloaded shopping app in 2023.”

In 2022, Temu was launched by PDD Holdings, which owns the Chinese e-commerce platform Pinduoduo. 

“It entered the South African market in January 2024, and within 3 months had become the most downloaded app in local app stores, on the back of massive advertising on Google and Facebook,” Nedbank said. 

“Both companies exploit economies of scale to ship goods by air freight to delivery partners around the world while keeping unit costs low.” 

“Since they have no overheads to pay on local brick-and-mortar stores or logistics infrastructure, they use their resources to flood the market with ads, especially on social media, where their paid promotions are unavoidable.” 

Unfortunately, the bank explained that local competitors simply don’t have the advertising budgets to compete for attention.

“Other low-cost Chinese online suppliers like Wish have declined in popularity despite initially making a big impact,” it said. 

“Wish attracted a lot of customers at first by offering loss-leader bargains at below cost – a strategy also employed by Shein and Temu – but as prices normalised and poor product quality became apparent over time, it lost market share and is now just one of many competitors in South African eCommerce.”

“If Shein and Temu are to avoid a similar fate, they might need to reconsider their supply chains to include more South African online vendors.” 

This strategy has been used by other international companies, such as Amazon. When it launched in South Africa last year, Amazon announced that it planned to source more than 60% of the items sold on its local site from independent local suppliers

“Unlike Amazon, Temu and Shein don’t include a supplier base drawn from local small and medium businesses in their planned operations,” Nedbank said.  

“They might need to reconsider if they want to counter the claims that they represent a danger to local textile producers and clothing retailers.” 

The sheer size of Temu and Shein’s operations has also led to increasing fears that these companies are selling goods produced using unethical labour practices.

The US government has confirmed that there was an “extremely high risk of forced labour contamination within Temu’s supply chains”.

Another strategy used to keep these companies’ operating costs down is their exploitation of a South African tax loophole by avoiding VAT and paying lower import duties.

The so-called ‘de minimis’ rule allowed parcels containing clothing with a value of less than R500 through customs with a payment of only 20% import duty and no VAT.

“Local retailers have always had to pay 45% customs duty as well as 15% VAT on all imported clothes,” Nedbank explained.

“This clearly wasn’t a level playing field for the local industry, even though it allowed international eCommerce stores to offer radically reduced prices.”

South African retailers, who pay full taxes and duties on the products they import, export, or sell locally, cannot compete under these conditions.

“Unions and retailers alike are concerned about job creation and even the impact on the environment of air-freighting cheap, mass-produced clothing around the world. The local industry demanded an investigation into the low-cost retailers.”

Nedbank explained that, in 2024, the National Clothing Retail Federation of South Africa and the Southern African Clothing and Textile Workers’ Union filed formal complaints with the government. 

In March of last year, the Department of Trade, Industry and Competition announced that it was investigating Shein for potentially avoiding import taxes.

“SARS has since decided that Shein and Temu cannot rely on the de minimis rule. Since 1 July 2024, shoppers have been required to pay the standard import tax on all orders from Shein and Temu, even if they cost less than R500.”

“For example, an item that used to cost you R120 on Shein or Temu will now cost you R166.”  

“Whether enforcing stricter tax compliance will be enough to help local clothing retailers compete with international giants remains to be seen. However, it will at least offer South African online shoppers access to more fairly priced options.”