There are separate career progression paths for diploma and degree holders in government sector.

Once you are placed in diploma scheme, you can only follow diploma career progression. Positions like managers, head of department, directors, etc are out of reach for you no matter how good a performer you are.

I don't have the full story but it seems unethical for the HR to try to trick you into diploma scheme when you have a recognised NUS degree. They may give you same starting pay as degree holder but you will lose out eventually.