The Central Board of Direct Taxes (CBDT), Ministry of Finance, has issued Circular No. 5 of 2026 dated 12 May 2026 providing detailed clarifications and FAQs on the implementation of the Safe Harbour Rules for sale of rough diamonds in Special Notified Zones (SNZs).
The Circular, issued under F. No. 370142/17/2026-TPL, addresses practical queries relating to Rules 99 to 102 of the Income-tax Rules, 2026, which provide a safe harbour framework for an eligible foreign company engaged in the business of selling raw diamonds in a notified special zone referred to under the Income-tax Act, 2025.
A key clarification relates to the meaning of “raw diamonds.” CBDT has clarified that merely possessing a Kimberley Process Certificate is not sufficient. All prescribed conditions under Rule 99(f) must be satisfied simultaneously. Importantly, sorted diamonds do not qualify as raw diamonds for the purposes of the safe harbour regime.
On taxation, the Circular clarifies that the applicable rate would be the rate applicable to a foreign company, i.e. 35%, along with surcharge wherever applicable. An eligible assessee declaring a minimum profit of 4% of gross receipts from the eligible business may avail the safe harbour framework. However, a foreign mining company availing the safe harbour benefit cannot claim deductions, in view of Rule 100(3) of the Income-tax Rules, 2026.
CBDT has further clarified that a foreign mining company opting for safe harbour may seek foreign tax credit in its home jurisdiction, depending upon the relevant Double Taxation Avoidance Agreement (DTAA) between India and that country and the domestic law of the foreign jurisdiction.
The Circular also specifies that the safe harbour option may be declared invalid where incorrect facts are furnished or material facts relating to the business are concealed, in terms of Rule 101(3).
On eligibility, CBDT has made it clear that the assessee need not be incorporated in India. The regime is intended for a foreign mining company; once incorporated in India, the entity would become an Indian company and would therefore not qualify for this safe harbour benefit in respect of sale of raw diamonds.
The FAQs further clarify that the foreign mining company must itself undertake the eligible business activity. Where an Indian trader is also involved, the profits of such Indian trader would have to be determined separately under the provisions of the Act.
For tax year 2024-25, CBDT has clarified that eligible foreign mining companies can avail the safe harbour benefit for the entire previous year 2024-25, and not merely from the date of the relevant notification.
The Circular also confirms that TDS provisions will apply to payments of sale consideration to foreign mining companies in accordance with the provisions applicable to foreign companies.
Where a foreign mining company does not opt for the safe harbour regime, its income will continue to be taxed under the normal provisions of the Income-tax Act read with the applicable DTAA, wherever relevant.
The Circular along with FAQs can be accessed at: https://www.incometaxindia.gov.in/documents/d/guest/circular_no_5_2026-pdf
