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 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. The taxation was a little lower in the last case, since the purchase of gold bars 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%. Thus, the effective increase in the price of gold jewelry comes to 3.24%, which means that gold has become slightly more expensive for Indian consumers.
Effects of GST on Gold Consumers
GST is taking a heavy toll on people who are fond of buying and making gold jewelry who now have to deal with a huge amount of compliance, with an increased amount 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 would have to pay a GST of Rs 3 and the total cost of the purchase would be Rs 103. Assuming that the price of gold 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 endow 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 a gold price tracking option.
The exchange of gold from old jewelry for new has also been affected, due to a 3% transaction fee.
Even the manufacture of new gold jewelry from customer-supplied scrap is also experiencing a drastic tax impact. Prior to GST, there was no tax impact on the manufacture of such jewelry, as the manufacturing charges (considered as labor charges), were exempt from 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:
Firstly, since there has been no exemption from GST for gold purchased for export purposes, this would incur a further lock on working capital. Secondly, 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 a lot of potential consumers. This would upset most international suppliers including bullion banks as they need to register as a non-resident company to ship consignment goods to India.
Impact on gold demand
As mentioned above, the slight increase in the tax has impacted the demand; however, it won’t be much of a problem for a period of time. It seems that jewelers have already made a good stock of gold before 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 144% year-on-year to 424.1 tonnes. This means that during the peak season of the fourth quarter, imports would be much lower. However, over the course of the year, we could see demand pick up as consumers and the industry adjust to the new environment.
Impact on the jewelry trade
It is clear that GST would prove beneficial to the organized sector and branded retailers would find it easier to comply with the new rules. Nearly 30% of the jewelery sector is ‘disorganized’ and could have difficulty implementing and complying 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 demonetisation, the crackdown on cash transactions has accelerated the process. This would help the organized sector and not the unorganized, 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, brand name retailers would have an advantage.
To sum up the scenario, we GST is a positive step in the right direction and over 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 for decades, gold has served as a favorite asset for Indians, GST would not bring any drastic negative impact.