CBDT Clarifies Safe Harbour Framework for Raw Diamond Sales in Special Notified Zones
The Central Board of Direct Taxes has issued Circular No. 05/2026-Income Tax dated 12th May, 2026, addressing key implementation questions surrounding the safe harbour framework applicable to foreign companies engaged in selling raw diamonds within Special Notified Zones (SNZs). The clarifications are issued under Section 239 of the Income-tax Act, 2025, and cover the operational scope of Rules 99 to 102 of the Income-tax Rules, 2026. This circular carries significant importance for foreign mining enterprises operating in India's diamond trade ecosystem.
Background and Legal Framework
Rules 99 to 102 of the Income-tax Rules, 2026 establish a dedicated safe harbour mechanism for foreign companies — classified as eligible assessees — that are engaged in the business of selling raw diamonds within notified special zones as contemplated under section 9(9)(c)(ii)(C) of the Income-tax Act, 2025.
The objective of this framework is to provide certainty and reduce litigation for foreign mining companies by prescribing a predetermined profit margin, upon declaration of which, the income-tax authorities shall accept the declared income without further scrutiny. Given the complexity of international diamond trade and cross-border transactions, CBDT received several queries from stakeholders regarding the implementation of these rules. The Board has now issued structured clarifications in a question-and-answer format, covering nine distinct areas of concern.
Q1: Definition of 'Raw Diamonds' — Do Sorted Diamonds Qualify?
Statutory Definition Under Rule 99(f)
One of the foundational questions addressed in the circular relates to whether all diamonds imported with a Kimberley Process Certificate — including both sorted and unsorted varieties — fall within the definition of "raw diamonds".
Rule 99(f) of the Income-tax Rules, 2026 provides a precise six-part definition of "raw diamonds." A diamond qualifies as a raw diamond only if it satisfies all of the following conditions simultaneously:
- It is uncut or unpolished
- It is unassorted
- It is unworked or simply sawn, cleaved, or bruted
- It is not a conflict diamond as defined under the Kimberley Process
- It is accompanied by a Kimberley Process Certificate issued by the relevant Kimberley Process authority in the exporting country
- It falls under Tariff Heading 7102 of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975)
Critical Clarification: The CBDT has explicitly stated that sorted diamonds do not qualify as raw diamonds under this definition. Furthermore, possession of a Kimberley Process Certificate alone is insufficient — every one of the six sub-conditions under
Rule 99(f)must be fulfilled concurrently.
This is a significant limitation that foreign mining companies must factor into their compliance assessments when determining which diamond stock qualifies for safe harbour treatment.