The proposed tax came as a shock to the UAE which has become a large diamond trading hub in the past 15 years.
The planned 5% VAT is a double blow for Indian exporters of polished goods and importers of rough diamonds from UAE will then have to pay tax of 5.25%, due to the Indian government's Goods and Services Tax (GST) of 0.25%.
Manufacturers are complaining that the new tax will further erode already razor-thin profits.
The shock at the proposed tax is all the larger because the Dubai Multi Commodity Centre (DMCC) in the last decade has attracted diamond companies from across the world with a tax-free environment. Many large Indian diamond companies have established their offices in Dubai.
Dubai's diamond trading reportedly had a value of $26 billion in 2016, compared with just $300 million in 2002 when the DMCC was established.
Among those commenting on the new VAT plan was DMCC Executive Chairman Ahmed Bin Sulayem. He said: "Our trading roots trace themselves back to the principles of a tax-free environment for import and re-export and a mindset that industry drives government, not that government drives industry.”
The Antwerp diamond industry, which saw some large diamond companies relocate to Dubai and has suffered from the withdrawal of the Antwerp Diamond Bank, which funded more than $1.5 billion to the diamond industry and operated in the city over the last 80 years, close down its operations, will doubtless be breathing a little easier at the VAT news.
With January 1 approaching, members of the Dubai and Indian diamond businesses will be nervously waiting to see if the UAE government changes its mind.