China Ends Diamond Tax Break, Sparks Industry Shakeup

Gems News: Beijing’s New Fiscal Direction

China is set to remove its preferential tax treatment for diamond imports through the Shanghai Diamond Exchange (SDE) starting November 1, 2025, ending years of fiscal privilege that helped build its diamond trade hub. Importers of polished diamonds via the SDE will now face the standard 13% value-added tax (VAT), up from an effective 4% rate. The SDE had long served as the gateway for nearly all legal diamond imports into China, making this change a landmark decision for both domestic and international players in the diamond supply chain. Midway through this transition, this Gems News report underscores that the end of this tax era could reshape China’s natural and lab-grown diamond markets in profound ways.

China’s decision to end diamond tax breaks may reshape global trade and boost its lab-grown diamond industry.
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A Long-Standing Advantage Comes to an End

The favorable 4% VAT rate was introduced to encourage the growth of China’s diamond trade, helping the SDE evolve into one of Asia’s most important diamond trading centers. Historically, while other imports were taxed at 17%, diamonds entering via the SDE enjoyed rebates that effectively brought their VAT down to a fraction of that. However, under the new directive, importers will now need to pay the full 13% VAT, dramatically increasing their upfront costs and erasing a long-standing advantage. For example, on a $1 million shipment, VAT obligations will jump from $40,000 to $130,000 — a staggering $90,000 increase that could squeeze already thin margins.

Ripple Effects on the Natural Diamond Market

This shift is expected to hit the natural diamond sector hardest. By increasing import costs, China could see reduced inflows of polished natural stones, compelling many traders to reassess their sourcing strategies. Indian suppliers, who dominate China’s polished diamond imports, are likely to feel the pain as their competitiveness diminishes. With profit margins in the midstream segment often hovering around single digits, the added tax burden could force wholesalers and retailers to pass costs onto consumers or scale back operations.

A Potential Boost for Lab-Grown Diamonds

Industry observers predict the new tax regime may inadvertently strengthen China’s lab-grown diamond industry. The removal of tax incentives for natural diamond imports makes domestically polished and manufactured lab-grown diamonds more cost-competitive. As lab-grown diamonds already command a price advantage and are gaining acceptance among younger consumers, this policy shift could accelerate their market share growth. The move aligns with China’s broader industrial policy to encourage local manufacturing and reduce dependence on imports, fostering more domestic value-add activities such as diamond cutting and polishing.

Strategic Realignments on the Horizon

The VAT increase is also likely to reshape global diamond trade flows. Suppliers may redirect their shipments toward more tax-friendly destinations, while Chinese firms may seek to expand vertically by investing in polishing facilities or partnerships in neighboring regions. Companies entrenched in the Chinese market will need to rethink their cost structures and pricing models, while lab-grown producers may seize this opportunity to enhance their branding and consumer trust through certification and sustainability positioning.

Outlook for the Industry

China’s decision to remove the SDE’s preferential VAT rate marks a pivotal moment in the global diamond trade. While natural diamond importers and traders brace for tighter margins, lab-grown and domestically processed stones could emerge as the new frontrunners. The shift may lead to a short-term slowdown in polished diamond imports but could ultimately stimulate domestic innovation and manufacturing capacity in the long term. Industry insiders believe this policy recalibration reflects China’s ambition to control more of the value chain — from production to retail — ensuring that future growth benefits local industries rather than foreign suppliers. The world’s diamond markets will be watching closely as the new tax era begins in November 2025.

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