China is trying to add lustre to its diamond industry and Shanghai's diamond exchange by making steep tax cuts. Under a new policy that is also aimed at discouraging smuggling, combined taxes will fall to a flat 17 per cent from 41 per cent on imported polished diamonds and 33.9 per cent on rough stones. The lower taxes will reflect reduced domestic taxes and the removal of all import duties, to be made effective in the near future, according to officials. 'In the past, the taxes were too high and that was not beneficial to the development of the diamond industry,' said Yang Zude, of the policy research department at the Shanghai Diamond Exchange. Shanghai opened its diamond exchange just over a year ago with considerable fanfare. Since then, it has failed to live up to expectations, and industry officials have blamed that on steep taxes. High taxes also led to rampant smuggling. Sales of diamond jewellery on the mainland reached 6.1 billion yuan (about HK$5.7 billion) last year, but more than 90 per cent of the stones were brought in illegally, the Shanghai Daily yesterday quoted officials as saying. The tax change will remove a 9 per cent import duty for polished diamonds and 3 per cent for rough stones as well as halve the domestic consumption tax to 5 per cent. While China is not obligated to make the move under its accession agreement for the World Trade Organisation, the duty reductions are part of an effort to bring average import tariffs down. 'Naturally, there is a connection to the WTO,' Mr Yang said. More importantly, the tax burden will be shifted from processors to retailers, making China more competitive as a processing centre with an eye on the export market. Industry officials in Hong Kong welcomed the move but said more would be needed to boost the mainland industry. 'There is still a hefty sales tax,' said Gaston D'Aquino, vice-chairman of the Diamond Federation of Hong Kong. 'But it is a step in the right direction, which will benefit the whole jewellery industry in China.'