Implications of GST- Gems and Jewellery sector
Gems and Jewellery sector is one of the fastest growing, export oriented and labour intensive sectors. Its contribution to Indian economy is quite significant. 6 to 7 % of GDP comes from this sector. Its contribution to foreign exchange earning stood at UDS 38.59 billion in 2016. India exports cut and polished diamonds, coloured gem stones, gold jewellery, medallions and coins and silver jewellery to the world. UAE, US, Russia, Singapore, Hong- Kong, Latin America and China are the biggest importers of Indian jewellery. About 65 per cent of the global diamond processing is done in India. The share of gems and jewellery in total exports was 15.8% in 2016.
CHANGES UNDER GST REGIME
Presently, tax levied on gold, gold and diamond jewellery is 2-2.5% (only exception being Kerala where tax is 5%) and jewellery making charges is exempted from any taxes. The gold imported for the purpose of export and raw diamonds are also exempted from taxation. Under the GST regime, which is to be rolled out on 1st of July, tax on gold, processed diamonds, gold and silver jewellery will be 3%, 0.25% on raw diamonds. Jewellery making charges will now be taxed at 5% (initially 18% was proposed). The Goods and Services Tax Council has exempted re- import of cut and polished diamonds after testing from payment of GST. The import duty on gold remains the same at 10%.
INDIA’S COMPETITIVENESS AND EXPORTS
A tax of 0.25% on raw diamonds, according to the veterans of this industry is a retrograde step. Rough diamonds are the key raw material for the export business and for a segment where 95% of the output is exported and whose global footprint is under constant stress from other economies like China, Dubai and Thailand, imposition of tax can hurt India’s competitiveness in global market.
Cost of manufacturing of diamonds will increase leading to increased prices for end produce. This will impact the customers both in the domestic country and the importing countries. India will be forced to re-evaluate the viability of conducting the cutting and polishing activity due to the thin margin in this segment.
Gems and jewellery sector is highly fragmented. 90% of the gold jewellery manufacturing and 70% of the retailers are in the unorganised MSME (Micro, small and medium enterprises) segment. This segment of the gems and jewellery sector will be hit the hardest. Getting this 90% base in the GST structure will be a challenge. These vendors will have to substantially improve their record keeping practice in order to be able to comply with the laws. Imposition of 5% GST on jewellery making charges which at present is nil, will increase the cost of production and thus the price of the final good. This will also make estimation of cost difficult for the manufacturers.
This segment has happily welcomed the changes under the new GST regime. They will suffer the least as the process of manufacturing and production is very much integrated as compared to the unorganised segment. Also, they have the capacity to partially absorb the increase in manufacturing cost. This will give them an edge over the manufacturers and retailers in the unorganised segment.
This segment believes that these changes will help this sector to grow into an organized and mature industry and also bring transparency and increase in tax compliance. The biggest advantage of GST regime will be that it will bring all indirect taxes under a single tax. It is expected to bring all the unorganised players into the tax net and thus create a level playing field for all the players.
At the same time, it is feared that the working capital requirement will increase substantially as the points of taxation have increased and it takes time to claim refund of input tax credit. This might block funds and increase the cost of borrowing.
Gems and Jewellery sector employ millions of skilled workers (karigars). Levying a tax of 5% on making of jewellery will hurt the karigars, especially the ones in the unorganised sector. Karigars will be required to maintain proper accounts. Making of a jewellery piece involves many karigars who individually carry out activities of mounting, setting and polishing. Keeping a proper record of cost of all these activities will be very hard due to absence of use of any sophisticated technology. This will increase the operational cost for both karigars and the manufacturers.
In order to fit into this new structure, karigars will have to learn by doing and keep upgrading their accounting and technological know- how.
Increase in tax under GST regime will make purchase of gold, gold and diamond jewellery expensive by 1%. The additional increase in cost due to increase in operational cost and tax on making charges will also have to be, at least, partially borne by the customers. Re-selling of gold for capital gains will also decrease as re-selling will now entail a loss of GST initially paid on the purchase of gold.
These, along with the cap placed on holding of gold (if source is not mentioned) might make customers skeptical of buying gold and gold articles, particularly for speculation purpose. Domestic demand is expected to decline in the immediate future.
Though the government has recognized this sector as an important sector for export promotion and has also allowed 100% FDI but the complications related to GST might deter new investors from investing in this sector, at least, in the short run.