Effects of GST on the jewelry business
The long-awaited hype about the biggest tax reform in India was finally released on July 1, 2017. The Goods and Services Tax (GST) on gold was set at a rate of 3%. It is higher than the previous taxes that included 1.5% VAT and 1% excise duty. Although it is below the expected GST of 5%, processing charges of 5% and customs duties of around 10% will still apply. However, the gold industry has also welcomed the 3% GST tax. Let us assess the impact of the GST on the demand for gold in India and how this service tax has affected the organized and unorganized gold business.
The pre- and post-GST scenario in the jewelry industry
Before GST, jewelers used to pay 10% customs duty on gold, 1% excise duty and 1.2% VAT. This added up to 12.43% when buying gold jewelry and 11.32% when buying gold bullion. Taxation was slightly lower in the latter case, since the purchase of gold bullion does not generate special taxes. With GST implemented at 3%, customs duties at 10%, and manufacturing charges at 18%, the effective rate comes to 15.67%. Therefore, the effective increase in the price of gold jewelery comes to 3.24%, which means that gold has become slightly more expensive for Indian consumers.
Effects of the GST on gold consumers
GST is taking a heavy toll on people who are into buying and making gold jewelry who now have to deal with a huge amount of compliance, with increased amounts of paperwork. The GST in the jewelery and gems sector is 3%, with the exception of rough diamonds, which are 0.25%. This has an immediate effect in lowering the resale value of gold. For example, if Mr X buys Rs 100 worth of gold, he will have to pay Rs 3 GST and the total cost of the purchase would be Rs 103. Assuming 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. Therefore, with GST, the impact of the transaction increased from 1% to 3% (approximately).
The government has advised not to invest in physical gold, but to invest the money in sovereign gold bonds. The consumer is likely to get ROI from gold bonds as there will be interest coupons attached and also an option to track gold prices.
The exchange of gold from old jewelry for new has also been affected, due to a 3% transaction cost.
Even the manufacture of new gold jewelry from customer-supplied scrap is also experiencing a drastic fiscal impact. Before GST, there was no tax impact on the manufacture of such jewelry, as the manufacturing charges (regarded as labor charges), were exempt from the service tax. However, there is no such exemption under GST, and under the new tax regime, it amounts to 18% GST. This is totally an unwanted effect.
Effect of GST on exports from the national area
In addition to SEZ, the domestic rate area has been affected for two reasons:
First, since there has been no GST exemption for gold purchased for export purposes, this would incur a further lock-up of working capital. Second, the export business has been negatively affected, as there is added value in the form of labor and design.
Even for a foreign consumer, the paperwork required to register as a non-resident business person must be completed. This would definitely determine many potential consumers. This would upset most international suppliers, including bullion banks, as they need to register as a non-resident company to ship goods on consignment to India.
Impact on gold demand
As mentioned above, the slight increase in the tax has impacted demand; however, it won’t be much of a problem for a period of time. It seems that the jewelers have already made a good stock of gold before the GST, as is clear from the import data. Therefore, it would be difficult to assess the full impact on demand now. According to GFMS data, gold imports in the first five months of 2017 increased by 144% year-on-year to 424.1 tonnes. This means that during the high season of the fourth quarter, the import would be much lower. However, in the course of the year, we could see a revival in demand, as consumers and industry adjust to the new environment.
Impact on the jewelry trade
It is clear that GST would be of benefit to the organized sector and branded retailers would find it easier to comply with the new rules. Almost 30% of the jewelery sector is ‘disorganized’ and could find it difficult to implement and comply with the new rules. Organized and branded jewellers, who also have integrated manufacturing, can avoid 18% GST on manufacturing. Furthermore, a structural shift towards organized commerce is already taking place and, after demonetization, the crackdown on cash transactions has accelerated the process. This would help the organized sector and not the unorganized sector, since the latter handle more cash. So overall, while there might be some major difficulty for the jewelry industry to comply with the new rules, organized and branded retailers would have an advantage.
To sum up the scenario, US GST is a positive step in the right direction and for a period both consumers and industry would benefit from more transparency. Although due to the lack of details, there are still concerns in some areas, this would not affect the jewelry industry much in the long run. As gold has served as a favorite asset for Indians for decades, GST would not bring any drastic negative impact.