About 130 million carats (26,000 kg) of diamonds are mined across the world every year. Of those, around 3 million carats make their way onto the Chinese mainland to be crafted by some 20,000 workers into dazzling symbols of enduring love.

But smuggling and illegal trade has plagued the sector for many years, prompting the Shanghai Diamond Exchange (SDE) to introduce a value-added tax (VAT) policy recently to overcome this problem.

The government-backed move is also expected to balance the tax burden and encourage diamond sellers to increase their investment.

Before the new policy, the VAT rate for rough diamonds entering the mainland through the SDE was 17 percent.

The new regulation cuts VAT on imports of rough diamonds and polished diamonds to zero and 4 percent, respectively.

While domestic and overseas diamond companies with units on the mainland were unable to say what the long-term effect would be, they welcomed the new policy.

The mainland is the largest diamond cutting and polishing centre after India, but in terms of revenue from the trade it still lags far behind not only India, but also Israel, South Africa and Belgium.

"The policy has been due for years and is definitely a positive one that will help our import and sales and help the business as a whole," said Dror Marom, regional manager of Dalumi Diamonds, an Israeli company with annual global sales of US$150 million.

"It's difficult to give a precise prediction because every new regulation needs time ... We expect our sales to jump 10 to 15 percent this year, and certainly hope the tax break will give us some help," Marom said, adding that he hoped the move would curb diamond smuggling, too.

"Many diamond industry players in China, including manufacturers, retailers and wholesalers, are now likely to legalize their business," Concept Jewellery Manufacturing Executive Director Fiona Wong said.

And that will take the country's diamond and jewellery industry to a much higher and more professional level, the top executive of the Hong Kong-based jewellery processor added.

A spokesman for Wing Hang Diamond, Hong Kong's leading diamond trading company, said the move would encourage his company to increase investment in its existing mainland gem units.

"That up to 90 percent diamonds enter the country through illegal channels is a great cause for concern. Chinese Customs collect a very meagre amount of VAT because only over 10 percent are imported through lawful exchanges," he said.

Diamonds were first recognized and mined in India, with the earliest written reference in Kautilya's Arthasastra (The Science of Economics - 296 BC).

But in February 2005, a joint Chinese-US archaeology team found four corundum-rich stone ceremonial burial axes dating back to China's Liangzhu and Sanxingcun cultures (4,000 BC-2,500 BC) that were believed to be have been polished using diamond powder.

However China has been a late entrant to the diamond trade, setting up cutting and polishing centres to take advantage, like India, of low labour costs. Diamond cutting and polishing is a highly specialized skill concentrated in a handful of cities, such as Antwerp (Belgium), Amsterdam (the Netherlands), Johannesburg (South Africa), New York (the United States), Tel Aviv (Israel) and Surat (India).

Though India handles about 90 percent of all cut and polished diamonds by number, it accounts for only 55 percent in terms of value. That's because larger or more valuable diamonds are more likely to be handled in Europe or North America.

Diamonds are sold in carats and valued according to the "4 Cs" carats, clarity, cut and colour. The carat weight measures the mass of a diamond, with one carat defined as exactly 200 milligrams (about 0.007 ounce).

(China Daily July 14, 2005)