China's policy makers are currently looking at plans to scrap the 5 percent consumption tax on gold jewelry, a move which could provide a great fillip to the nation's gold processing industry.

The China Gold Association proposed to the State Administration of Taxation last November that the tax should be scrapped.

In an encouraging development, it has been reported that the administration has attached great importance to the issue, and delivered it to the State Council, China's cabinet.

Association Vice-Secretary-General Xu Shouxin was unequivocal about what the State Council should do.

"The consumption tax on gold jewelry should be scrapped, to further the development of the industry," said Xu.

The association made its proposal to the administration after conducting an investigation into gold processing enterprises and gold jewelry traders in major processing areas like the Pearl River Delta and big gold jewelry consuming cities including Beijing and Shanghai.

Xu told China Daily there was the "great possibility that the central government will abolish the consumption tax this year."

China began to levy a 10 percent consumption tax on gold jewelry in 1993. The tax was reduced to 5 percent and transferred from consumers to retailers in 1994.

Gold jewelry was a luxury at that time for most Chinese people, and the special tax severely limited sales of gold jewelry, Xu said.

"However, the consumption tax is unnecessary today, as gold jewelry has become a common commodity for most Chinese families, with the country's rapid economic development and rising living standards," Xu said.

And the consumption tax is even more of an anachronism, given that the central government began to speed up its reform of the gold market management system in 2001.

The State had a monopoly on the purchasing and allocation of gold for over 50 years.

This situation changed in 2002 with the establishment of the Shanghai Gold Exchange.

In addition, the State Council further liberalized the gold jewelry market in early 2003 by abolishing more than 100 administrative approval procedures.

"With the opening up of the gold market, taxation is a major factor affecting the development of the industry," Xu said.

The levying of the consumption tax put a relatively heavy burden on gold jewelry processing and trading enterprises.

Statistics show that the profit margin in the gold jewelry sector is less than 2 percent, compared with a gross profit of as high as 30 to 40 percent for diamond and gem products.

With meagre profits, some small and non-standard traders tried to avoid the tax payment and lure more consumers with cheaper prices, leading to unfair competition in the industry.

"One of the reasons we put forward the proposal is to help create a comparatively fair competitive environment for enterprises," Xu said.

Scrapping the consumption tax will also mean that gold jewelry processing enterprises will be able to earn higher profits, and improve their designing and manufacturing technology.

"It will be good news for the business, as better-designed and elaborately processed products will attract more consumers," Xu said.

However, whether consumers can benefit from the likely new policy will be determined by both enterprises and retailers, he added.

He suggested that gold jewelry enterprises should make good use of the policy to improve their competitiveness, rather than using it to simply cut the price of gold jewelry.

Luo Pengfei, an industry analyst at CITIC Securities, said prices are likely to come down, but this would be limited.

"The 5 percent tax cut is small for enterprises in terms of marginal utility," Luo said.

The better way to develop the industry is to increase the added-value of the products and to change Chinese consumers' attitudes towards gold and increase consumption, Luo added.

Per capita gold consumption in China is just over 0.7 grams a year, compared with 11 grams in the United States and Europe, although China has become the third largest country in terms of gold consumption, standing at more than 200 tons last year.

(China Daily March 4, 2004)