In a statement issued on June 12, Diamond Administration of China (DAC) said that the actual VAT for polished diamond imports through the CSDE will be reduced from its current 17 percent to 4 percent, effective as of July 1, 2006.

There will be no VAT imposed on rough diamonds when imported via the CSDE.

As per existing regulations, the Shanghai Diamond Exchange is a tax-bonded area, and the customs office located inside CSDE will remain the exclusive channel in China for the import and export of diamonds under general trade. The reduction of VAT will only apply, during the first stage, when a diamond is imported via the CSDE.

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 in that a polished diamond importer will pay four percent VAT. CSDE will then issue an invoice of 17 percent for tax offsetting purpose when the goods enter the next stage of the pipeline, according to the statement.

A VAT will not be imposed on rough diamonds if imported through CSDE. If the polished product of the above-mentioned imported rough is sold back into Shanghai Diamond Exchange (regarded as export) after processing, VAT for the added value obtained in the processing sector is exempted together with that of the import value. These polished diamonds can then be exported overseas, and/or re-imported into the domestic market by paying 4 percent VAT and getting a 17 percent tax invoice for offsetting at the next stage. If the polished product of the above mentioned imported rough is sold directly in the domestic market after processing, then the 17 percent VAT will be applied.