On the historic midnight of 30th June, when India’s labyrinth of taxes was replaced by GST, all sectors – wholesellers, retailers and consumers, et al, have been more or less affected by this fiscal reform.
Gold industry was not left behind. Even as consumers will face a slightly higher tax rate in gold after the Goods and Services Tax (GST) the overall impact on the gold industry will be positive, as confirmed by The World Gold Council.
The yellow metal much-loved by Indians will attract taxes to the tune of three per cent under the new tax regime. There are two important GST rates which will affect the industry. The first is the 3% tax on gold products, such as jewellery. In addition, there is an 18% tax on services that will apply to firms and individuals providing manufacturing services across the gold supply chain. This is a significant part of the industry.
Currently, jewellers pay 10% customs duty on gold and pay 1% excise plus 1.2% VAT over and above that. This effectively works out to 12.43% when buying jewellery and 11.32% when buying bars since bars do not attract excise duty. With the introduction of GST at 3% for gold and 18% for making charges, the effective rate comes to 15.67% when we include 10% customs duty. So, the effective price increase on gold jewellery comes to 3.24%. It is clear that gold is going to get slightly expensive for consumers in India.
Gold bars will be dearer by 1.98%, after GST while jewellery will be expensive by 3.24% compared to current levels.
On the other hand, uncut diamonds will be taxed at 0.25 per cent. Like gold, three per cent will be levied on silver and polished diamonds as well. Coupled with making charges taken by jewellers, the prices are likely to go up.
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 in a more advantageous position as there is an interest coupon attached to bonds and it tracks local gold prices.
World Gold Council has said “India’s gold market is highly fragmented. Jewellery’s retailing landscape is dominated by small businesses – regional and national chains only account for around 30% of the market. The picture in jewellery manufacturing is more extreme, with 95 per cent of the industry consisting of small-scale operations. However, this is changing and in recent years, large retailers and manufacturers have been gaining market share. It is likely that GST will accelerate the pace of consolidation. Firms that currently outsource manufacturing services from artisans and incur the 18 per cent GST rate may look to develop in-house capabilities. Small jewellery shops, which may have illegally benefited by not paying tax will lose that advantage, and large retailers can compete on a level playing field”.
As mentioned by WGC, GST is clearly going to benefit the organised trade more, given that organised and branded retailers will find it easier to comply and implement the new rules. For branded and organised jewellers who have integrated manufacturing, the 18% GST on making charges can be averted. A structural shift towards organised trade is already under process and demonetisation and clampdown on cash transactions has hastened up the process. On the whole, there will be teething troubles initially for the industry to comply with the new set of rules but large organised and branded retailers will be at an advantage.
GST has brought in a more efficient supply chain as confirmed by the World Gold Council. The advent of GST has eased out the process of warehousing. Previously, for any kind of inter – state sale of jewellery, CST was attracted and levied. In order to avoid this tax, firms had set up warehouses in all those states having their area of operations so that sales were booked intra-state and not inter-state. This process was both cumbersome and expensive. The firms had to incur very high amount of logistical costs and often held excess levels of inventory. Under GST, while inter-state stock transfers will be taxable, the tax can be reclaimed once the goods are sold. If, for example, a large nationwide retailer had excess jewellery stock in one state and wanted to transfer it to a store in another state, it would pay IGST, which it can then off-set against sales revenue. Being able to reclaim the tax removes the incentive to maintain stock in multiple warehouses across India, and will allow retailers to become more efficient by consolidating warehouses and holding lower levels of inventory.
This process has a few challenges like, in some instances, firms may have valuable working capital tied up. Working capital may be tied up from the time at which the stock transfer is made (and GST is paid) to when stock is sold by the receiving store and the tax is reclaimed.
Summing it up we believe that GST is a step in the right direction and over a period, both the industry and consumers will stand to benefit with increased transparency. Gold has been a favoured asset for Indians over several decades and demand from GST is unlikely to be negatively impacted.