The new policy will come into effect early next year, and the country's diamond imports and exports are required to go through declaration formalities with customs bureau inside SDE.

"Many domestic and overseas companies applauded the adjustment," he said. "Concerned departments are at work on the specific rules."

Currently, besides the 17 per cent value-added tax and 10 per cent consumption tax, the tariff for rough diamonds and polished diamonds are 3 per cent and 9 per cent respectively.

After the adjustment, the consumption tax formerly collected at the stage of import and processing is to be postponed until the stage of retailing, and the consumption tax for unset polished diamond and diamond jewellery is to be collected at a reduced rate of 5 per cent.

China is not a diamond-rich country, but its diamond processing staff rank only second to India, reaching 15,000.

Statistics showed that sales volume of diamond ornaments in China has amounted to 700 million last year, and its share in the world market has risen from 0.5 per cent to 1.8 per cent.

According to SDE, Shanghai is among one of the biggest diamond consumption markets in the country, occupying about 30 per cent of the nationwide sales. Its exports also took up 80 per cent of that of the country.

Yet the high taxation resulted in rampant trafficking, and the business was greatly affected. It is estimated that over 80 per cent of the diamonds in the market are there through trafficking.

The two diamond processing zones which were set up after the establishment of SDE only did moderate business in the past year.

Authorities hoped the new taxation policy in line with international practice could help to expand the market and fuel the business.

Not all jewellery companies are as optimistic as policy makers.

To Baocheng Diamond Processing Co Ltd, the new policy will not be of benefit in the short term.

"A big question is how to deal with our diamonds bought before the drop," said the company's general manager, who asked to be identified as Feng.

"Our recent business has not been very good because many people are waiting for the adjustment to buy cheaper stones."

Feng also worried whether the company should pay the postponed consumption tax when it sells out the diamonds in store next year. In his opinion, the retail price may not drop after the adjustment because of the trafficking.

The lifting of tariff means nothing to traffickers, while postponement of consumption tax may increase their cost, Feng said.

"A regulated market cannot form in a short time, yet the policy is beneficial in the long term when the trafficking is well under control," he added.

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