In the first six months, the trade volume amounted to US$17.7 million, 90 per cent of which was traded after the tariffs on the jewels at the exchange was effectively lifted in May, said Fang Xiong, vice-chairman of the SDE Administration.

Before that, in addition to the 17 per cent value-added tax and 10 per cent consumption tax, the tariffs for rough diamonds and polished diamonds were 3 per cent and 9 per cent respectively.

Steep taxation has kept diamond manufacturers, processors and dealers away from the official exchange and has resulted in rampant smuggling.

Insiders estimate that 95 per cent of the diamonds in the market were obtained through trafficking.

"We could hardly compete with those who import diamonds through illegal channels," said Pan Bin, general manager of the 70-year-old Shanghai Diamond Factory, the city's major diamond processor and dealer.

After the reforms, the consumption tax formerly collected at import and processing stages will be postponed until the retail stage, and the consumption tax will be collected at a reduced rate of 5 per cent.

Meanwhile, compared with the formerly refunded rate of 13 per cent, the tax collected at the processing stage will be fully refunded when the diamond is exported.

"The new policy renders legal players like us a favourable competitive position in the market, as the import cost is sharply cut down," said Pan, who is also the chairman of Shanghai Diamond Association.

He predicted a 20 to 30 per cent surge in revenues this year.

Fang said that the new policy will help curb the smuggling now that the profit margin has sharply narrowed.

(China Daily July 17, 2002)