The Ministry of Finance, State Taxation Administration and General Administration of Customs of China have jointly issued the “Notification on VAT Adjustment for Diamonds and the Shanghai Diamond Exchange”, which will be effective from 1st of July 2006.
The actual VAT for polished diamonds imported through the Shanghai Diamond Exchange (SDE) will be reduced to 4 percent from 17 percent. No VAT at the import stage will be imposed on rough diamonds when imported via SDE.
As per existing regulations, SDE is a tax-bonded area, and the Customs located inside SDE remains to be the exclusive channel in China for the import and export of diamonds under general trade (vs. processing trade). The reduction of VAT will only apply for the first stage when a diamond is imported via SDE.
VAT is a transactional tax, levied on each value-added transaction at each section of the value chain, from importation — if the commodity is imported — to wholesale and, finally, to retailing. For imported goods, VAT is first collected at the point of import by Customs, based on import value.
VAT-collecting procedure for polished diamonds is different from that of rough diamonds. Namely, a polished diamond importer will pay 4 percent VAT, and the Customs in SDE will issue an invoice of 17 percent for tax offsetting purpose when the goods entering next stage of the pipeline.
No VAT will be imposed on rough diamonds if imported through SDE. (1) If the polished product of the above-mentioned imported rough is sold back into SDE (regarded as export) after processing, VAT for the added value obtained in the processing sector is exempted together with that of the import value. And these polished diamonds can be exported to overseas, and/or re-imported into the domestic market by paying 4% for VAT and getting 17% tax invoice for offsetting at the next stage. (2) If the polished product of the above-mentioned imported rough is sold directly in the domestic market after processing, then 17% of VAT is applied.
The Notification also ratifies SDE to charge trading fee on transactions.
Notice on details of implementation will be released by the Customs before 1st of July 2006.