Finance Departments (Bureaus) of all provinces, autonomous regions, municipalities directly under the central government, and cities under separate planning; Financial Bureau of the Xinjiang Production and Construction Corps; Guangdong Branch of the Customs; Tianjin and Shanghai Special Offices; and all directly affiliated customs offices:

To standardize the domestic diamond market and balance the tax burden on similar products, with the approval of the State Council, we hereby notify you of the following tax policies concerning diamonds and the Shanghai Diamond Exchange:

1. Taxpayers who sell rough diamonds from the Shanghai Diamond Exchange to the domestic market are exempt from value-added tax at the import stage. For finished diamonds sold from the Shanghai Diamond Exchange to the domestic market, any portion of the actual value-added tax burden at the import stage exceeding 4% will be refunded immediately by the customs authorities upon collection. Upon entering the domestic distribution stage, taxpayers may offset their input tax credits against the value-added tax amount indicated on the tax payment certificate issued by the customs.

Since the implementation of the policy exempting value-added tax at the import stage and providing immediate refunds for diamonds sold by taxpayers from the Shanghai Diamond Exchange to the domestic market, when diamonds are shipped from the Shanghai Diamond Exchange to the domestic market, customs will continue to enforce management in accordance with current regulations.

II. The following diamond products exported by exporting enterprises are exempt from value-added tax. The corresponding input tax credits will not be refunded or offset and must instead be transferred to costs. The specific product ranges are as follows: tariff classification numbers 71021000, 71023100, 71023900, 71042010, 71049091, 71051010, 71131110, 71131911, 71131991, 71132010, and 71162000.

Tax authorities in various regions should pay close attention to export trends of products containing diamonds. If they discover that a company exports products containing diamonds with a significant proportion of diamond value, and such products do not fall within the product categories listed above, or if other issues are identified during implementation, they should promptly report these findings to the Ministry of Finance and the State Administration of Taxation.

3. A value-added tax exemption policy will be applied to rough diamonds produced by domestic diamond mining enterprises and sold through the Shanghai Diamond Exchange. For those not sold through the Shanghai Diamond Exchange, value-added tax will be levied according to applicable regulations.

4. For finished diamonds processed domestically and sold through the Shanghai Diamond Exchange, value-added tax is exempted at the domestic sales stage. For those not sold through the Shanghai Diamond Exchange, value-added tax shall be levied at a rate of 17% at the domestic sales stage. For finished diamonds processed domestically that enter the Shanghai Diamond Exchange, they shall be treated as exports and are not eligible for tax refunds. Once these diamonds re-enter the domestic market from the Shanghai Diamond Exchange, the portion of the import-stage value-added tax burden exceeding 4% shall be refunded immediately by the customs authorities upon collection.

V. Business tax shall be levied in accordance with the law on transaction fee income earned by the Shanghai Diamond Exchange and annual membership fees paid by members.

6. With regard to the bonded policies of the Shanghai Diamond Exchange and other tax policies applicable to diamonds, the current regulations shall continue to be enforced.

7. The specific operational procedures for the immediate refund of value-added tax at the import stage shall be formulated by the General Administration of Customs. The management measures for the collection of value-added tax on diamonds at the domestic stage and the management measures for special value-added tax invoices shall be formulated separately by the State Administration of Taxation.

8. Industrial drills imported under general trade procedures will no longer be subject to centralized customs clearance and unified management at the Shanghai Diamond Exchange. Instead, import tariffs and value-added tax at the import stage will be collected in accordance with applicable regulations.

This notice shall take effect as of July 1, 2006.