Chinese Legislation
Along with the creation of an institutional structure in the form of the establishment of SDE, the Chinese government also undertook certain policy changes in order to promote the development of the industry. In August 2001, the government issued a policy document on readjustment of the import export administration and taxation. The two policy documents regulating the trading framework of diamond through Customs are (1) Provisions of the General Administration of Customs (GAC) on the Supervision of Diamond Entry and Exit at the Shanghai Diamond Exchange and (2) Notice of the GAC on the Implementation of Policies Concerning Diamond and Diamond Jewellery Imports. The two documents make it clear that the Shanghai Diamond Exchange (SDE) is a special zone established with the approval of the State Council for the handling of diamond import and export formalities and for customs control in the diamond trade. GAC maintains an office within SDE to carry out closed management.
In May 2002, General Administration of Customs (GAC) also officially promulgated the Rules of Supervision of diamond traded in Shanghai Diamond Exchange (SDE). At the same time, in a notification to all customs posts in China, General Administration of Customs clearly stated that beginning June 2002, all diamond imported into China, except those for processing, will have to be reported for customs purpose at the single customs post created at SDE. Other customs posts will not be allowed for export or import procedures, or for export tax rebate.
The Provisions cover measures for the management of SDE and its members, the supervision of movement of diamonds between SDE and offshore enterprises and between SDE and domestic enterprises, as well as the management of diamond processing. The Notice stipulates that with effect from 1 June 2002, diamond imports and exports under China's general trade and the domestic sales of diamond under the processing trade are required to complete import and export customs declaration formalities at the SDE customs office; other customs offices may not handle these two categories of diamond imports and exports. The SDE customs will levy import related  VAT on the domestic sale of diamonds mentioned above (including diamonds in finished products). Diamonds imported into China (except Hong Kong, Macau and Taiwan) through SDE will be exempt from import tariffs.
The new rules also stipulate the following:
The consumption tax formerly collected at the import and processing stage will be postponed until the retail stage.
The consumption tax for unset polished diamonds and diamond jewellery will be collected at a reduced rate of 5 per cent.
Rough diamonds and unset polished diamonds directly entering the SDE from overseas will be exempted from value-added taxes and consumption taxes.
Diamonds traded in the SDE will be exempt from value-added taxes. Full tax refunds will be given based on the difference between the former refund rate of 13 per cent and the tax collected at the processing stage, when the diamonds are exported.
Diamond flowing from the SDE to overseas will not enjoy tax refunds.
Value-added tax shall be duly paid on diamonds imported from the SDE for use in domestic markets.
For customs supervision, if diamonds imported in the name of processing trade are to be sold domestically, the diamonds must be sent to the SDE for transactions or filing.
The Ministry of Finance and the State Administration of Taxation (SAT) jointly issued a notification in December 2001, announcing a new tax policy starting 1st January 2002. This policy allowed duty-free import of all types of diamond through the customs post established at SDE, while at the same time making downward adjustments in consumption tax. After this readjustment, actual import tax on semi-finished diamond and finished diamond products fell by nearly half. This was a major policy decision to promote the development of diamond industry in China. Thus by narrowing the cost-gap between standard and non-standard import of diamond, smuggling activities were controlled to a certain extent. This also introduced order into the market and curbed tendencies of fierce and virulent competition on the part of small and dispersed enterprises.

VAT:
At present, production VAT is being imposed, though consumption VAT is being introduced in some sectors in the Northeast of China. There are two levels of taxes, namely a base rate of 17% and a low rate of 13%. Precious metal products and minerals that have not undergone processing are taxed at the rate of 13%. Processed stones and other precious metals jewellery are taxed at 17%. In order to simplify the tax administration, the State further decided that small scale producers with annual sales volume of less than one million RMB will pay taxes at the rate of 6%.  Small scale wholesalers engaged in the jewellery industry with annual sales below 1.8 million RMB would pay taxes at the rate of 4%.  Resources Tax:
Resources tax is imposed on those units which develop taxable mining products within China.  This is a specific tax. For non-industrial and jewellery-grade diamond, resources tax is 10 RMB  per carat, while for industrial diamond, it is 2 RMB per tonne.  Consumption tax:
Consumption tax is an indirect tax imposed on consumers of particular consumer goods and it is being levied in China at present on items like cigarette, liquor, cosmetics and jewellery. Several jewellery items are taxed at the rate of 10%. Non-mounted diamond and diamond jewellery, diamond-inlaid precious metal jewellery and gold jewellery are taxed at 5%. There are some indications that the 5% consumption tax on gold jewellery might be revoked in 2004. China Gold Association has proposed to the State Administration of Taxation that the 5% consumption tax on gold jewellery be scrapped. It is reported that SAT has attached great importance to the matter and delivered it to the State Council. Consumption tax was 10% in 1993, which was reduced to 5% in 1994, when the tax burden was transferred from the consumers to the retailers.  Import:
Imported raw materials for jewellery are taxed at a lower rate. For instance, MFN rates for sorted and unsorted natural pearls are respectively 25.8% and 25.7%, non-processed industrial diamond (both natural and synthetic) and diamond powder are free of tax, import tax on non-processed gemstones is 3%. Finished products are taxed at a higher rate. For instance tariffs on precious metal jewellery are 30% (25% under Bangkok Agreement). Rates have been falling since China’s accession to the WTO. Import tariffs for the year 2004 are given at appendix E in Resources section.  Export:
Consumption tax is not imposed on export products. Export tax rebate is granted on export of gemstones (13%), diamond (17%) and natural and artificial pearls (5%).  Special taxation policies within SDE:
No import VAT/ consumption tax or tariff is levied on imported diamond traded directly within SDE.
Diamond traded within SDE is exempt from VAT and consumption tax.
Domestic diamond, once it enters SDE, is recognized as export, and export rebate is granted while consumption tax is exempted.
Diamond taken out of SDE for sale in the domestic market is taxed.
I. Investment Climate in China
After China’s WTO accession, in order to streamline the process of approval for foreign direct  investment into China, and to clarify the country’s social and economic priorities, the central  government promulgated a set of new Regulations for Guiding the Direction of Foreign  Investment in 2002, to replace the Provisional Regulations for Guiding the Direction of Foreign  Investment (1995). The new Regulations assign the responsibility for regularly publishing a  Foreign Investment Catalogue to the National Development & Reforms Commission (NRDC), the  Ministry of Foreign Trade and Economic Cooperation - renamed as Ministry of Commerce  (MOFCOM) in March 2003, and the State Economic and Trade Commission (now absorbed in the  restructured MOFCOM). This catalogue guides the examination and approval of foreign investment projects.  Under the Regulations, foreign investment projects fall into four categories: Encouraged, Restricted, Prohibited and Permitted. Projects in the first three categories are defined in the Catalogue in detail, while permitted projects are all those outside the purview of the first three.  There is some flexibility within the Catalogue; for instance, projects in the ‘Permitted’ category will be deemed ‘Encouraged’ if they export 100% of their output. The category to which a project belongs has implications in terms of investment approval and the extent of tax exemptions. 
Encouraged foreign investments include the following:
Projects related to new agricultural technology, construction of energy sources, transportation and raw materials for the industry
Projects using new or advanced technology, including projects that can increase product  quality, save energy and raw materials, raise economic efficiency and alleviate shortages  in the domestic market. 
Projects that meet international market demand, enhance product quality, open up new markets and increase exports
Projects that involve integrated use of China’s resources or use of renewable resources, involving new technology or equipment for preventing and controlling environmental pollution.
Projects that can develop the manpower and resources of central and western China.
Restricted categories of foreign investment include the following:
Projects already developed in China, where the technology has already been imported and where capacity can meet market demand Projects with an adverse effect on the environment and energy conservation Projects involving exploring for and/or extracting rare or precious mineral resources, and Projects in industries requiring central planning by the state
Prohibited foreign investments include the following:
Projects that endanger state security or harm public interest
Projects that pollute the environment or endanger human health
Projects that occupy large tracts of farmland or endanger the security or efficient use of military resources
Projects that use manufacturing techniques or technologies unique to China, and
Other projects prohibited under state laws and administrative regulations
In more concrete terms, the catalogue does not enumerate gems and jewellery manufacturing among the encouraged, restricted or prohibited categories; thus, it is a permitted category. Thus, if an Indian gems and jewellery manufacturer exports 100% of its produce, it can qualify as an encouraged category in terms of investment approval. Exploration and mining of precious metals (gold, silver and platinum etc.) and precious non-metallic ores (like diamond), on the other hand, are included in the restricted category.

China’s participation in the Kimberley Process
China is a permanent member of the United Nations Security Council. It has been in the Kimberley Process since the process started. On December 30, 2002, six government ministries and commissions such as the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (AQSIQ), the General Administration of Customs, as well as the Ministry of Foreign Trade and the Economic Cooperation issued a joint announcement that the People’s Republic of China would implement KPCS, fulfill its international obligation, and prohibit illegal trade of conflict diamonds, to  safeguard the peace and stability of Africa from January 1, 2003.
According to the announcement, from January 1, 2003, rough diamonds described by KPCS would be listed in Chinese Catalogue of the Commodities for Entry-exit Inspection and Quarantine. Those rough diamonds also belong to Commodities whose import is restricted in the Regulations of the People's Republic of China on the Administration of the Import and Export of Goods. Furthermore, importation and exportation of those diamonds only could be taken between member countries of Kimberley.
In addition, all the importers or exporters, agents, and carriers who participate in diamond trade shall take relevant certificates and register at a designated entry-exit inspection and quarantine institution of the port. When exporters are going through the exit formalities, exporters shall provide a declaration of non-conflict diamonds and relevant documents which can prove the validity of those rough diamonds for export to the exit inspection and quarantine institution of the port. After checking such documents by the exit inspection and quarantine institution of the port, certificates such as Kimberley Process Certificate for Rough Diamonds of the People's Republic of China and the Commodity Inspection Bill of Export Goodsshall be issued for the qualified individuals or organizations. Moreover inspection of rough diamonds shall be completed by the exit inspection and quarantine institution of the port based on relative provisions.
As for rough diamonds for import or export, China adopts overall management, regardless of different modes of trade and means of transportation. The Customs shall go through the entry-exit formalities for rough diamonds in accordance with the Commodity Inspection Bill of Export or Import Goodsissued by the inspection and quarantine institution of the port and other relevant documents.
The inspection and quarantine institution appointed by the AQSIQ is the agency responsible for accepting and checking the inspection and quarantine report for entry-exit rough diamonds under processing trade, and for issuing Commodity Inspection Bill of Export/Import Goods. Except through the processing trade, diamonds imported by other existing approaches of trade (including border trade, etc.) shall be managed under the mode of ordinary trades.
In addition, central government authorizes the Trade and Industry Department of the Government of Hong Kong Special Administrative Region of the People’s Republic of China to be in charge of businesses such as issuing and checking the Kimberley Process Certificate in Hong Kong special administrative region and so forth.

Regulation of the People's Republic of China on the Implementation of Kimberley Process Certification Scheme 2007-08-30 
 
Chapter One  
General Provisions

Article 1 
This Regulation is formulated, in accordance with the requirement of UN General Assembly Resolution 55/56 and the related laws and rules of China, with an eye to eradicate illegal trading of conflict diamonds, to maintain peace and stability in Africa and to implement the Kimberley Process Certification Scheme in the People's Republic of China.

Article 2 
Rough Diamonds refers to diamonds that are unworked or simply sawn, cleaved or bruted and fall under the relevant Harmonized Commodity System Description and Coding System 7102.10, 7102.21 and 7102.31.

Article 3 
The General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China is the governing body for the Kimberley Process Certification Scheme in China, which will designate relevant Administrative Bodies of Entry-Exit Inspection and Quarantine (hereinafter referred to as "the Administrative Bodies").

Article 4 
The Kimberley Process Certificate is the official statement with legal force.

Article 5 
This Regulation is applicable to application for the import and export of rough diamonds as between Participants of Kimberley Process Certification Scheme.
 
Chapter Two  
Registration

Article 6 
The General Administration of Quality Supervision, Inspection and Quarantine will implement a system of registration on the import and export of rough diamonds.

Article 7 
The importers, exporters, agents and shippers in the territory of the People's Republic of China will be permitted to engage in the import and export of rough diamonds only after they have registered with the Administrative Body of Entry-Exit Inspection and Quarantine.

Article 8 
The following materials must be supplied for the registration: (I) The People's Republic of China Kimberley Process Certificate Application Form (Annex 1); (II) The Statement to abide by the Kimberley Process; (III) Copy of business license of the enterprise; (IV) Other materials required.

Article 9 
After review and inspection by the Administrative Body, the qualified application will be registered and a Kimberley Process Registration Certificate will be issued thereafter with duration of two years (Annex 2). Inspection must be made upon the extension.
 
Chapter Three 
Import Review and Inspecting

Article10 

Before rough diamonds enters the country, the importers, exporters, agents and shippers (hereinafter referred to as "the Applicant"), shall provide the following documents: The People's Republic of China Rough Diamonds Import Application Form (Annex 3); The original Kimberley Process Certificate issued by the administrative bodies of the rough diamonds exporting country to handle the import procedures. Those applications without the above documents will not be accepted.

Article 11 
After the Administrative Body accepts the application, it will, in accordance with the requirements of the Kimberley Process Certification Scheme, review the application as being in compliance with the Kimberley Process Certificate issued by the exporting authorities, focusing on the country (region) of origin/ provenance country, carat, value, recipient document number, etc.

Article 12 
With the Applicant present, the working staff of the Administrative Body will check the packages and sealing marks on spot; check whether the internal and external package are in conformance with the accompanying Kimberley Process Certificate. In the meantime, they will also inspect the quality of rough diamonds at a designated place, identify the value and carat weight/amount. For rough diamonds in satisfaction of the requirements, the Administrative Body will issue a People's Republic of China Rough Diamonds Certificate and the Clearance of Importing Commodities, against which the Customs will discharge. In case the requirements are not satisfied, the Customs will not discharge. The above-mentioned work shall be done within two working days.

Article 13 
After the review and inspection, the Administrative Body will send the People's Republic of China Rough Diamonds Certificate to the governing body of the origin/provenance country be e-mail, to confirm that the set of diamonds has arrived at the destination.

Article 14 
The Administrative Body shall keep the People's Republic of China Import of Rough Diamonds Application Form, the original Kimberley Process Certificate issued by the exporting authorities, and the People's Republic of China Import of Rough Diamonds Conformation Certificate, in files for a period of three years.

Article 15 
For transit rough diamonds, when the applicant guarantees that the airproof packages unsealed and uninterrupted, the Administrative Body will just make a sample spot-inspection when necessary, without having to check the Kimberley Process Certificate, nor to confirm with the authorities of rough diamonds country/region of origin/provenance.

Article 16 
As for the rough diamonds entering the bonded area, if they are to be worked in the bonded area or to request clearance, related procedures shall be done according to Chapter Two and Three of this Regulation.
 
Chapter Four Export Review and Inspection

Article 17 

Before the rough diamonds shipped across the border, the applicant shall provide the Administrative Body with the People's Republic of China Export of Rough Diamonds Application Form (Annex 4), declaring that the rough diamonds is non-conflict diamonds, guaranteeing that the exporting rough diamonds are deposited and transported in damage-proof containers, in the meantime rendering the contract, invoice, value-appraisal certificate and other materials proving the legality of the rough diamonds.

Article 18 
After the Administrative Body accepts the application, with the applicant present, the working staff will check the packages and sealing marks on spot; check whether the internal and external package are in appliance with the accompanying Kimberley Process Certificate. Meanwhile, they will also inspect the quality of rough diamonds at a designated place, identify the value and carat weight/amount. For rough diamonds in satisfaction of the requirements, the Administrative Body will issue a People's Republic of China Rough Diamonds Certificate and the Clearance of Importing Commodities, against which the Customs will discharge. In case the requirements are not satisfied, the Customs will not discharge. The above-mentioned work shall be done within two working days. The Certificate expires in two months.

Article 19 
After the Administrative Body receives (by way of e-mail) the Confirmation on the rough diamonds issued by the importing authority, it shall keep the Confirmation, copy of the People's Republic of China Export of Rough Diamonds Application Form, contract, invoice and the duplicate People's Republic of China Kimberley Process Certificate for files for a period of three years.
 
Chapter Five 
Statistics

Article 20 
The Administrative Body shall keep the trading record of Kimberley Process Certificate into a database, which includes the number of copies, amount, carat weight, HS code, country/region of origin and provenance country, trading countries, importer and exporter, No. of the Certificates, number of copies and amount of Confirmation. The data shall be kept for a period of three years.

Article 21 
The General Administration of Quality Supervision, Inspection and Quarantine will publish the related information, in accordance with the requirement of Kimberley Process Certification Scheme about the content, frequency, time and the mode of exchange of data.

Article 22 
The Applicant shall keep the complete trading document and the related information, including the title of the selling or buying client, the carat weight and value of the rough diamonds bought, sold, imported or exported, for a period of three years.

Chapter Six 
Legal Responsibility

Article 23 
Those who is engaged in the illegal trading of conflict diamonds by providing false information about the country/region of origin and provenance, or by forging or altering the Kimberley Process Certificates, will be published according to the Law of the People's Republic of China on Import & Export Commodity Inspection, and in case a crime is committed, will be handled to judicial organ for trial.

Article 24 
Should the working staff of the Administrative Body neglect his job or duty and cause adverse political influence or economic lost to the state, the violators shall be punished according to the Law of the People's Republic of China on Import & Export Commodity Inspection.

Article 25 
For the purpose of promoting trade and facilitating supervision, the trading institutions of diamonds will cooperate with the Administrative Body and provide necessary conveniences.
 
Chapter Seven 
Supplementary Provisions

Article 26 
For the purpose of the international certification scheme for rough diamonds the following definitions apply:

CONFLICT DIAMONDS means rough diamonds used by rebel movements or their allies to finance conflict aimed at undermining legitimate governments, as described in relevant United Nations Security Council (UNSC) resolutions insofar as they remain effect, or in other similar UNSC resolutions which may be adopted in the future, and as understood and recognized in the UN General Assembly (UNGA) Resolution 55/56, or in other UNGA resolutions which may be adopted in the future;

COUNTRY OF ORIGIN means the country where a shipment of rough diamonds has been mined or extracted;

COUNTRY OF PROVENANCE means the last Participant from where a shipment of rough diamonds was exported, as recorded on import documentation;

DIAMONDS means a natural mineral consisting essentially of pure crystallized carbon in the isometric system, with a hardness on the Mohs (scratch) scale of 10, a specific gravity of approximately 3.52 and a refractive index of 2.42;

EXPORT means the physical leaving or taking out of any part of the geographical territory of a Participant;

EXPORTING AUTHORITY means the authority or body designated by a Participant from whose territory a shipment of rough diamonds is leaving, and which are authorized to validate the Kimberley Process Certificate;

FREE TRADE ZONE means a part of the territory of a Participant where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside of the customs territory;

IMPORT means the physical entering or bringing into any part of the geographical territory of a Participant;

IMPORTING AUTHORITY means the authority or body designated by a Participant into whose territory a shipment of rough diamonds is imported to conduct all import formalities and particularly the verification of accompanying Kimberley Process Certificates;

Article 27 
The applicant shall pay the charges as required.

Article 28 
This Regulation is to be interpreted and amended in accordance with the decisions made on the Annual Meeting of Kimberley Process and other relevant rule of China, by the General Administration of Quality Supervision, Inspection and Quarantine.

Article 29 
The Regulation is to be implemented by the designated administrative bodies of Entry-Exit Inspection and Quarantine.

Article 30 
The Regulation is to come into force as of January 1, 2003.