Under a new tax policy package to be unveiled next month, the general tax rate for diamonds entering the domestic market from the exchange will be lowered from nearly 34 percent to 17 percent, including the removal of the 3 percent import tariff, according to Huang Qifan, director of the Shanghai Economic Commission.

At the same time, the target of the consumer tax will be shifted from processors to retailers, and the consumer tax rate will be reduced from 10 per cent to 5 percent.

Initiated by the State Council, the new plan will also enable diamond processors to enjoy a full 17 percent tax drawback after export, said Huang. Currently, the export drawback rate is only 13 percent.

"The package has been worked out as a special favor to the exchange in Shanghai,'' Huang noted.

The heavy taxes on diamonds, almost the steepest in the world, have been a major hurdle for foreign dealers who want to trade at the local exchange, which opened on October 27th, 2000 and has attracted more than 40 registered trading members.

The current nearly 34 percent tax rate is mainly made up of import tariffs, consumer taxes and value-added taxes. In contrast to this, many other countries levy no tariffs on diamond imports and no consumer taxes.

Diamonds have been regarded as a luxury item in the country over the last decades, which resulted in the high tax levy.

"The new package is a breakthrough in the existing policies guiding domestic diamond trading and will greatly bolster the growth of our exchange,'' said Yang Zude, a senior economist of the Shanghai Diamond Exchange Administration, the overseer of the exchange.

Yang admitted that, with the exception of several pilot gem-processing deals, the exchange's business has remained sluggish since its highly anticipated opening, because many dealers have been daunted by the heavy taxes.

And the stiff taxes have resulted in rampant gem smuggling in China in recent years as dealers attempt to avoid the high taxes.

Insiders say more than 90 percent of diamonds on the domestic market, valued at about 5 billion yuan (US$602 million), have been smuggled into the country through provinces in South China.

As Shanghai Customs will be designated as the sole entry port for diamonds in the new plan, the inflow of smuggled diamonds will be significantly curbed, Yang said.

Thanks to the new policies, jewelers will be able to sell home-processed diamonds instead of selling illegal imports, and foreign companies will also have easier access to the domestic market, analysts said.

"We take it as a positive move on the part of the government, as hefty taxes have been the biggest stumbling block for us,'' said Yu Xiaodong, senior executive of De Beers Diamond Trading Company.

Nonetheless, despite the seemingly encouraging new policies, the government still has a long way to go, as many other places in Asia are also attracting foreign dealers with generous preferential tax policies, Yu said.

(eastday.com 09/23/2001)