THE Ministry of Finance and the Ministry of Commerce seem at rare public odds over China's import duty on luxury goods.

The Ministry of Finance, which oversees taxation, said last week that it would be wrong for China to scrap or reduce the tax.

That came just days after a spokesman at the Ministry of Commerce said that key ministries are about to submit a proposal to the State Council asking for the tax rate to be cut.

"China's tax on luxury goods is the highest in the world," the Ministry of Commerce said in an article published on its website. "The tax makes products several times more expensive in the domestic market than overseas. It causes people to spend more in foreign countries."

Every sophisticated Chinese shopper knows that!

For instance, perfume importers pay consumption tax, value-added tax and import duties amounting to 57 percent of the scent's original price. The taxes on fine imported wines can be as much as 92 percent.

A survey conducted by the Ministry of Commerce showed that prices of foreign luxury goods sold on the Chinese mainland are, on average, 45 percent higher than in Hong Kong, 51 percent higher than in the United States, and 72 percent higher than in Europe.

Chinese consumers are wise to all this and are clever in finding ways to circumvent the tax. If they don't travel abroad themselves to pick up bargains, they make shopping lists for friends or relatives who do.

Just ask Li Xin. The 34-year-old senior manager at a foreign tourism bureau said her trips overseas invariably involve having to buy cosmetics, handbags, watches and electronic products for friends and relatives back home.

'Kind-hearted mules'

"I feel rather like a mule when I travel abroad," Li said. "But I do enjoy comparing prices, and I guess I don't mind helping people save a lot of money."

Li said her purchases usually tally up to two-thirds of the cost in the domestic market. One time she bought a belt for 100 euros (US$144) in France. Later she found the same product priced at more than 2,000 yuan (US$308) in China.

People who don't have ties to "kind-hearted mules" like Li resort to online agencies, which charge commissions for helping people make overseas purchases.

This business model has developed into what's called daigou, or surrogate dealers. Many people choose daigou because even after paying commissions, prices of certain imported products are cheaper. Last year, the transaction value of such deals was estimated at 12 billion yuan.

Various channels linking Chinese consumers directly with foreign sellers, including foreign tours, foreign business trips and daigou, have expanded rapidly in recent years.

According to the World Luxury Association, China is now the second-largest consumer of luxury goods and may eclipse Japan to become No. 1 next year, with forecast sales of US$14.6 billion. At the same time, more than 80 percent of the spending on luxury goods takes place in foreign markets, it said.

That means a lot of money being drained out of Chinese government coffers and may be one reason why the Ministry of Commerce seems so eager to get import duties relaxed.

"A cut in duties would play an important role in stimulating domestic consumption," the ministry explained on its website. "It is a trend of the times."

The ministry needs all the help it can get. It has made a poor showing so far this year in its responsibility to encourage consumer spending.

In the first five months, China's retail sales, a broad measure of domestic consumption, rose 16.6 percent from a year earlier to 7.1 trillion yuan. The pace compared with 18.4 percent in the same period of 2010.

China's retail sales are expected to soften further as government subsidies on purchases of household appliances and green cars lapse.

The lukewarm spending trend contrasts sharply with China's trumpeted goal to shift the engine of economic growth more toward to domestic consumption and away from reliance on exports.

Unfazed by arguments

The Ministry of Finance seemed unfazed by the arguments of its commerce counterpart. It is arguing the tax on luxury goods is an effective way to maintain social equality and protect domestic companies.

"The taxes affect rich people and should be raised rather than reduced," said Liu Shangxi, a senior researcher with the finance ministry. "Besides, stronger reliance on imported goods may damp the competitiveness of domestic companies."

Mei Xinyu, a respected economist in Beijing, agrees with the Ministry of Finance, noting that growth in consumption should be built on enhancing domestic brands, not encouraging foreign ones.

"It is reasonable to have a higher tax on luxury goods over primary products or machinery parts to allow room for the development of domestic industries," Mei said.

Any cut in taxes would place tighter fiscal restraints on the government, which narrowed its revenue stream by raising the personal income tax threshold to 3,500 yuan from 2,000 yuan last week.

Consumption tax, value-added tax and duties on imported goods raised 1.25 trillion yuan of revenue last year, according to the Ministry of Finance, which didn't break down the categories. The rare public debate between two powerful ministries has stalled any immediate action on luxury goods tax.

Adam Xu, a principal at the Booz & Co. in Shanghai, said it is only a matter of time before the dueling ministries come to some kind of accord.

"The market economy tells us that taxes would be better lowered to reflect demand and supply," Xu said.

"However, on this particular issue, I don't think certain ministries should pin too much hope on spending from the rich or other buyers of luxury goods," Xu said.

"A healthy development model requires that the biggest chunk of consumption should come from the general public, or the middle class," he said. "People on the top crust of wealth alone can't sustain the economic growth expected by the government."