The much-awaited hype on the biggest tax reform in India finally rolled out on July 1, 2017. The Goods and Service Tax (GST) on gold fixed at a rate of 3%. It is higher than the former taxes that included 1.5% VAT and 1% excise duty. Though it is below the anticipated GST of 5%, the processing charges of 5% and customs duty around 10% would continue to apply. However, the gold industry has also welcomed the 3% GST tax. Let us assess the impact of GST on the gold demand in India and how this service tax has affected the organized and unorganized gold business.
The Pre-and Post GST Scenario in Jewellery Industry
Prior to GST, the jewelers used to pay a 10% customs duty on gold, 1% excise duty, and 1.2% VAT. This totaled up to 12.43% when buying gold jewelry and 11.32% when purchasing gold bars. The taxation was a bit less in the latter case, as gold bars purchase does not attract excise duty. With GST implemented at 3%, customs duty of 10% and 18% of making charges, the effective rate comes to 15.67%. Hence, the effective price increase on gold jewelry comes to 3.24%, which means that gold has become slightly expensive for the Indian consumers.
GST Effects on Gold Consumers
GST is taking a heavy toll on the people fond of buying and making gold jewelry now have to face a lot of compliance, with an increased amount of paperwork. The GST on jewelry and gems sector is 3%, with an exception to rough diamonds, which are at 0.25%. This has an immediate effect on decreased resale value of gold. For instance, if Mr. X buys gold worth Rs. 100, he will have to pay a GST of Rs. 3 and the total cost of buying would be Rs. 103. Presuming that the gold price remains constant, after six months, if Mr. X wants to sell the gold, the GST amount would be lost at the customer level and he would get Rs. 100. Thus, with GST, the transaction impact has increased from 1% to 3% (approx).
The government has advised not to invest in physical gold, rather endow the money in gold sovereign bonds. The consumer is likely to get ROI on gold bonds as there will be interest coupons attached with it, and also a tracking option for gold prices.
The gold exchange trade of old jewelry for new ones has also been affected, due to a transaction cost of 3%.
Even making new gold jewelry from scrap supplied by customers is also witnessing some drastic tax impact. Prior to GST, there was no tax impact on the making of such jewelry, as making charges (considered as labor charge), exempted from service tax. However, no such exemption exists under GST, and under new tax scheme, it amounts to 18% GST. This is totally an undesired effect.
Effect of GST on Export from Domestic Area
Other than SEZ, the domestic tariff area has been hit on two counts:
Firstly, as there has been no exemption from GST for gold procured for export purposes, this would incur in a higher blockage of working capital. Secondly, export business has been adversely affected, as there is value added in the form of labor and design.
Even for an overseas consumer, required paperwork needs to be undertaken to register as a non-resident business person. This would definitely deter many prospective consumers. This would alter most international suppliers, including the bullion banks, as they need to register themselves as the non-resident business to send goods on consignment to India.
Impact on Gold Demand
As before mentioned, the slight increase in the tax has cast an impact on the demand; however, it won’t be of much an issue over a time-period. It seems, jewelers have already done a good stock of gold before GST, as it is clearly evident from import data. So, it would be difficult to assess the full-fledged impact on the demand now. As per the GFMS data, the gold import in the first five months of the year 2017, have surged 144% year-on-year to 424.1 tons. This means that during the peak season of Q4, the import would be much lower. However, over the course of the year, we could see a revival in demand, as the consumers and the industry adjust to the new environment.
Impact on Jewellery Trade
It is clear that GST would prove beneficial for the organized sector and branded retailers would find it easier to comply with the new rules. Almost 30% of the jewelry sector is ‘unorganized’ and they might face difficulty in implementing and complying with the new rules. The organized and branded jewelers, who also have integrated manufacturing, can avert the 18% GST on the making. Moreover, a structural shift toward the organized trade is already in the make and post demonetisation, the clampdown on cash transactions has paced up the process. This would help the organized sector and not the unorganized ones, as the latter deal more with cash. So, overall, though there could some primary difficulty for the jewelry industry to comply with the new rules, the branded and organized retailers would be at an advantage.
To sum up the scenario, we GST is a positive step towards a right direction and over a period both the consumers and the industry would benefit with increased transparency. Though due to lack of detail, there are still concerns in some areas, these would not affect much in the long run to the jewelry industry. As for decades, gold has served as a favored asset for the Indians, GST would not bring any drastic negative impact.