China’s diamond trade enters a new era as the government ends VAT concessions on imports via the Shanghai Diamond Exchange, bringing tax fairness but tighter margins and tougher competition.
A recent change in China’s tax policy may appear technical, yet it represents one of the most significant shifts in the country’s diamond trade in two decades. On 17 October 2025, the Ministry of Finance, the General Administration of Customs, and the State Taxation Administration jointly announced that the long-standing value-added tax (VAT) concessions for diamonds traded through the Shanghai Diamond Exchange (SDE) would be abolished.
Effective 1 November 2025, both the VAT exemption for rough diamonds and the “levy-and-immediate-rebate” mechanism for polished diamonds have been terminated. Importers must now pay the full 13% VAT at the point of import for all diamonds sold into the domestic market, replacing the earlier arrangement under which they paid 13% but immediately received a 9% refund—leaving an effective 4% burden.
It is widely believed in the industry that, this change’s underlying rationale appears to be the pursuit of tax fairness and regulatory consistency across industries. Policymakers are aligning diamond taxation with the general VAT regime, phasing out preferential arrangements that no longer reflect today’s fiscal logic and current industrial landscape.
From Tax Relief to Real Cash Costs
For two decades, China’s diamond industry benefited from an unusual fiscal structure. The SDE, China’s only authorised platform for general-trade diamond imports and exports, allowed members to clear goods under a framework that combined duty exemption, deferred consumption tax and partial VAT rebate. It was not a subsidy, but it significantly eased liquidity pressures, and encouraged domestic trading.
That advantage has now disappeared. Customs has confirmed that both VAT incentives are withdrawn; all diamond imports entering the domestic market are now fully subject to import-stage VAT (13%). The removal of the VAT benefit immediately reshapes the economics of doing business.
For the natural diamond midstream, the change means higher upfront cash requirements. VAT is now payable in full upon import and recoverable only after the goods are sold, extending the cash conversion cycle. Traders must tie up more capital in tax deposits, adjust financing arrangements and re-evaluate stock levels, leading to a clear rise in cash-flow pressure and working capital intensity.
Margin Squeeze and Retail Implications
The disappearance of the low-burden regime will likely compress midstream margins. Retailers who have been already navigating a cautious consumer market are unlikely to absorb the entire cost increase. As purchasing costs rise, wholesalers may narrow their assortments and manage inventory more conservatively, slowing replenishment cycles to control cash exposure, while retailers may become even more selective in replenishment.
For the natural diamond value chain, this translates into a tougher retail environment: higher landed costs meet stable or soft demand. The near term may see price adjustments and renewed bargaining between suppliers and buyers. The policy, in effect, accelerates a long-running shift from policy-driven profitability toward market-driven resilience.
From now on, Chinese industry players will need to respond more by strengthening brand differentiation, retail storytelling and supply-chain efficiency. In a world where fiscal advantage no longer cushions the business, competitiveness will rest on emotional value, transparency and execution. Meanwhile, Hong Kong is set to once again become a retail paradise for mainland Chinese tourists purchasing natural diamonds.
Lab-Grown Diamonds: A Secondary Ripple
Although the policy is neutral in wording, its consequences extend to lab-grown diamonds (LGDs). Previously, polished LGDs processed overseas and imported via the SDE could enjoy the same VAT concessions (9% refund) as natural stones. With those incentives gone, the cost gap between imported and domestically manufactured LGDs narrows. This makes local production relatively more attractive, this may not only reduce China’s exports of semi-processed LGDs for finishing abroad, but also enhance the price competitiveness of LGDs processed in China compared with those processed overseas.
While naturals lose a financial edge, LGDs gain a small structural one—mainly through a more level fiscal field. Yet the policy does not signal favouritism; it reflects the government’s goal of equal treatment across comparable goods (like other gemstones), and also underscores China’s position as the world’s largest producer of lab-grown diamonds, while encouraging domestic midstream processing and trading, as well as activity at the retail end.
A Fairer System, A Harder Market
The guiding principle behind the reform is straightforward: neutrality and fairness. By integrating diamonds into the standard VAT regime, China eliminates preferential distortions, simplifies administration and improves transparency, which also reflects the landscape of diamond industry in China.
For Indian exporters, the reset will also reshape trade mechanics. Much of India’s diamond trade already flows through Hong Kong, which remains a critical logistics and trading hub connecting global suppliers with Mainland buyers. The policy may further underline Hong Kong’s role as firms balance flexibility and compliance. Even so, the Shanghai Diamond Exchange, China’s sole designated general trade gateway for diamond imports, remains central to the Mainland’s import ecosystem. It is revealed that, the SDE will continue to enjoy duty-free imports and the deferred collection of consumption tax. The bonded business (like bonded warehousing, bonded viewing, and bonded trading) in SDE will be more active. Chinese buyers are likely expected to favour memo or bonded-inventory models that delay VAT crystallisation until a confirmed domestic sale, or to negotiate longer payment windows to offset higher pre-financing costs.
Over the coming months, the market will enter a phase of price discovery and operational recalibration. For natural diamonds, the shift will serve as a test of adaptability rather than a punitive measure, as the industry adjusts to a more neutral fiscal landscape. In the lab-grown diamond sector, China’s growing market will reflect a contest between China and India over technology and cost efficiency across the production and processing stages. The fiscal tide that once lifted the trade has receded; those who build stronger systems, sharper positioning and leaner balance sheets will be the ones who stay afloat.
Afterword
In addition to the adjustment of the VAT on diamond imports, the same announcement also reinstated the 13% VAT on platinum and platinum jewellery. Less than a fortnight later, on 29 October, the Ministry of Finance and the State Taxation Administration issued a further notice concerning changes to the taxation of gold.
This new policy represents a structural departure from the previous “levy-and-refund” VAT model, introducing a clear distinction between investment and non-investment transactions. By using taxation as a lever, the government aims to encourage investment-related gold trading to take place within the Shanghai Gold Exchange and the Shanghai Futures Exchange.
For gold used in jewellery and other non-investment purposes, only 6% of the 13% VAT is now deductible, effectively raising the retail price of gold jewellery. As a result, the industry is entering a phase of more effective supervision coupled with higher tax costs, which will curb speculative trading activity. Meanwhile, manufacturers face increased acquisition and utilisation costs for gold, which are likely to be passed on to consumers.
Taken together, these changes mean that all major materials in the jewellery sector — diamonds, coloured gemstones, gold and platinum — are returning to a normalised tax regime. The era of preferential treatment has drawn to a close. From here onwards, jewellers will move beyond competition based on traffic and price, and towards a higher level of rivalry built on brand strength, supply chain capability, and design & craftmanship excellence.
Liang Weizhang, CEO of HubWis Jewellery Strategic Creations (Guangzhou) Co., Ltd., is a senior analyst and strategic researcher in the jewellery industry. He is the founding President of the Guangzhou Diamond Exchange and Vice Chairman of the Guangdong Gold Association. With nearly 30 years of experience in the diamond, gold, and jewellery sectors in China and internationally, Liang offers deep industry insight and a strong professional network. His company supports jewellery businesses with strategic consulting, industry advice, and access to global markets.
