Dubai Dominates, Surat’s Diamond Ambitions Falter

Surat : The dream of Surat and Mumbai becoming rough diamond trading hubs has been set back as Dubai overtakes Antwerp as India’s leading rough diamond supplier. The Special Notified Zones (SNZs) in Mumbai and Surat, set up by the Gems and Jewellery Export Promotion Council (GJEPC) to facilitate direct sales of rough diamonds, are struggling to compete due to India’s high corporate tax rates on foreign sellers. Dubai’s tax-friendly environment has made it a preferred route for re-exports, hindering India’s goal to become a global diamond trading hub.

The GJEPC is urging the government to implement tax reforms to revive the SNZs, such as exempting foreign diamond sellers from corporate tax and expanding the scope of eligible entities to boost direct sales. Without these changes, India risks losing further ground to Dubai, which benefits from a favorable tax regime for diamond trading. Additionally, India’s diamond industry faces further pressure under the India-UAE CEPA agreement, which allows the zero-duty import of cut and polished diamonds from Dubai, impacting the domestic manufacturers’ competitiveness.

GJEPC has set up two Special Notified Zones in Mumbai and Surat with the aim of inviting the diamond mining companies and big rough diamond dealers to auction their goods for the direct purchases by the diamantaires. Recently, the GJEPC inaugurated SNZ spanning 4,500 square feet, with the facility including 15 cabins, a state-of-the-art high-security monitoring room, and a comprehensive 24/7 security system.

Dubai does not produce diamonds yet its share in India’s import of rough diamonds is increasing steadily. Dubai imports rough diamonds from Botswana, Angola, South Africa, and Russia and re-exports these to India. Belgium’s share of India’s rough diamond imports dropped from 37.9 per cent in FY20 to 17.6 percent in FY24, according to GTRI.

Meanwhile, Dubai’s share increased from 36.3 per cent in FY20 to 60.8 percent in FY24 and further to 64.5 per cent in April-June 2024. A major reason for the higher share of Dubai is India’s high corporate tax regime applicable for foreign suppliers of rough diamonds. This forces them to re-export diamonds to Dubai and export from there to India. This has rendered India’s Special Notified Zones (SNZs) in Mumbai and Surat largely ineffective.

GJEPC has urged the government to consider its long pending demand of the sale of rough diamonds in Special Notified Zones (SNZs) through the Safe Harbour Rule and to expand the ambit of entities entitled to operate through SNZs.

Currently only viewing sessions are held by mining countries at SNZs. These zones were established with the prime objective that there would be easy availability of rough diamonds by creating efficiencies in procurement of rough diamonds by allowing overseas diamond mining companies to sell their produce directly to Indian manufacturers through such SNZs,” GJEPC said in a statement.

“Sale is allowed in countries like Belgium and Dubai, while there is no direct tax on sale of displayed rough diamonds in Dubai and there is 0.187% turnover tax on sale in Belgium. Indian bidders do not buy rough diamonds from SNZ as on date, as the waiver under section 9(1)(i) of the Income Tax Law to such sale at SNZ by FMCs (foreign manufacture certification) is not provided,” it further stated.

As per GTRI, to make the Special Notified Zones (SNZs) in Mumbai and Surat successful and establish India as a diamond trading hub, it is important to exempt foreign rough diamond sellers from corporate tax. These zones, set up in 2015, allow international diamond mining companies to display rough diamonds for Indian buyers, helping India become a global diamond trading hub. However, the 40 per cent corporate tax on foreign firms selling diamonds in India has made the SNZs unattractive. As a result, companies are re-exporting rough diamonds and finalizing sales in the UAE to avoid high taxes.

In the 2024 budget, a new policy was introduced to lower corporate tax on foreign firms selling diamonds directly in India and the new rates expected by December 2024. To compete with the UAE, India should exempt these foreign firms from corporate tax when selling through SNZs and treat such sales as regular imports subject to import duties, not corporate tax. Without this change, India is losing out to Dubai, which benefits from these transactions at India’s expense.

The government should also reconsider zero tariff import of cut and polished diamonds from Dubai under India-UAE CEPA. Currently, India imports rough diamonds duty-free, cuts and polishes them locally, and imposes a 5 per cent duty on imported cut and polished diamonds. Under the India-UAE CEPA, cut and polished diamonds can now be imported at zero duty with just 6 per cent value addition in Dubai. This change will put significant pressure on the margins of domestic manufacturers, who may struggle to compete with zero-duty imports from Dubai. Many local businesses could be forced to shut down or relocate, leaving importers and traders to dominate the market to the disadvantage of domestic producers.