China’s new 20 percent sales tax on luxury watches (i.e., over $1,200 retail), which became effective April 1, has upset Swiss watchmakers and the Swiss government. Almost all imported luxury watches sold in China (99.6 percent) are Swiss.

Switzerland has urged China to rescind the tax, but it refuses to do so.

The consumption tax—which China says is intended to reduce a widening gap between its country’s rich and poor—will slow down Swiss watch sales in China, warned Swiss industry sources. China imported $2 billion worth of Swiss watches in 2005, making it the 10th most important market among Swiss watchmakers.

The Swatch Group, the world’s largest watchmaker, sells 8 percent of its products (especially upscale watches) in China. It urged the Swiss government to press China to end the tax. Omega, a high-end Swatch Group brand, is the official timekeeper for the 2008 Olympic Games in Beijing.

Joseph Deiss, Swiss minister of the DFE, criticized the tax at Switzerland’s BaselWorld watch fair in April and sent a formal letter to Beijing on behalf of the Swiss government protesting the tax and urging China to reconsider it.

In a written reply in late May, Jin Renqing, China’s minister of finance, refused to do so. He said the tax applies to both domestically made and imported watches, and doesn’t discriminate against a specific country or watchmaking industry. China also contends the tax won’t deter any Chinese consumers who want to buy Swiss watches.

A DFE spokesman said it will “study the situation” for the next year, in union with the Swiss watch industry, and then decide if a “new intervention” is required.

Meanwhile, some Hong Kong watchmakers reportedly see the tax as an opportunity to get Chinese consumers to switch from foreign timepieces to similar, less-expensive Hong Kong brands. Hong Kong watches retailing for more than $1,200 are also subject to the tax, but a trade agreement with the Chinese mainland exempts Hong Kong from a 23 percent import tax, making its watches more competitive with foreign timepieces.