The Goods and Service Tax (GST) Council has been kind enough to provide a special 3 per cent GST to gems and jewellery sector ( the exception being rough diamonds at 0.25 per cent).
Going by the economic survey of India and the hype which was created in the run-up to this meeting, a much higher rate was feared. However, the rate of GST for jewellery is in line with what it was under the old tax regime.
GST has increased paperwork and lot of compliance. Only time will tell if we as a country or an industry are ready for it.
The immediate impact would be on the investment buying of gold by consumers as the resale value will be down by three per cent. Here' an example:
Mr A bought gold worth Rs 100
Paid GST Rs 3—————Total cost Rs 103
Now, after 6 months he wants to sell this gold and presuming that the gold price remains constant, he will get Rs 100 and the GST amount would be lost at the consumer level.
The transaction impact cost has increased from about one per cent to three per cent.
From the government's point of view, this is in line with their thinking/ planning — don’t invest in physical gold, rather invest in gold sovereign bonds. The consumer will also be better of as there is an interest coupon attached to bonds and it tracks local gold prices.
The exchange business of old jewellery for new ones will also be affected as the cost of 3 per cent will affect the transaction.
Another area which will affect the industry and the consumer is making of gold jewellery out of gold/scrap supplied by the customer. At present, there was no tax impact on the making of jewellery. Labour or making charges of jewellery were exempt from service tax (similar exemption was also under excise rules ). Under GST no such exemptions exist and making charges will be subject to 18 per cent GST. This is an undesired result.
Export from domestic tariff area (other than SEZ ) will be hit on two counts:
One, there is no exemption from GST for gold procured for export purposes. This would mean a higher blockage of working capital.
Second, the export business will also be harmed. It depends on raw material (gold ) being supplied by oversea buyers and the Indian party makes the jewellery and exports i.e. value addition in the form of design and labour.
Under GST regime, the overseas customer will have to register as a non-resident business person and undertake the required paperwork. This will deter many customers.
Bullion imports system may be disturbed/altered as most international suppliers (including bullion banks) sending goods on consignment to India will have to register as a non-resident business. This requirement may deter many players operating in India.
The diamond segment, particularly in the home state of Gujarat, had a total exemption from indirect tax. Value-added tax was zero in Gujarat and there is no excise on diamonds.
A majority of this business is in the export sector and the export port is mainly Mumbai. Thus, branch transfer between Mumbai and Surat is frequent and as per current tax laws, this is tax-free. However, under the GST regime this will attract three per cent GST (on the movement of polished diamonds ).
The diamond segment of the gems and jewellery industry is well equipped to fulfill most of the paperwork requirements of the GST Act.
Moreover, all movements under GST Act has to be accompanied by an e- waybill. This e–waybill has to be generated from GST portal.
(E-waybill is a document generated from GST portal which has complete details of goods moved from one location to another as a place of movement quantity and value thereof.)
If you look at diamond trade, an international buyer would generally visit one office and stay put. A lot of small players and other diamond businessmen would send their goods to a single office for inspection/selection. Thus, there is a lot of movement of goods from one office to other even within the diamond bourse. To create an e-waybill for this will be virtually impossible.
E–way bill could harm this trade beyond repair. I am not against compliance or paperwork but do we have internet infrastructure to support such a compliance?