BUSINESS IN THE GST ERA

This story could be straight out of a moral science textbook. A small girl, of around five years of age, was unwell with a stomach infection. She took her syrup for fever happily as it was sweet. However, she did not quite like the medicine for the stomach infection as it was very bitter. She simply refused to drink it – yelling and weeping non-stop. No amount of cajoling helped. Fed up of the histrionics, the mother roped in the father to convince her, but to no avail. Finally, their collective patience ran out, the father pinned her down and the mother pinched her nose and forced the medicine down her throat. The next dose of medicine did not take that much time and the little girl has since then taken her bitter pill whenever it was required.

The Indian bullion/jewellery industry could well empathise with the tale. For, they went through a similar experience last year when 1% excise duty was thrust down their throat by a very persuasive, resolute and adamant government at the centre.

No sooner did the union finance minister announce the excise duty, than the jewellery trade took to arms and went on an indefinite strike. For, the imposition of excise duty reminded them of the days of the obnoxious Gold Control Act and the draconian powers that the excise department wielded.

The trade panicked and refused to listen to the government, demanding that the tax be withdrawn. The standoff lasted for over 40 days and finally the trade was forced to swallow the bitter pill, as the government made it clear that even if the shops were closed for 1,000 days it would not budge. However, the government did retreat a bit as the excise duty was imposed only on branded jewellery. The government put the message across in no uncertain terms that the excise duty was imperative for the roll out of the Goods & Services Tax (GST).

The government ushered in GST amid much fanfare in a midnight session in the Central Hall of Parliament. Whether it is the most important reform since independence should be best left to politicians to squabble among themselves. The government claims that after demonetisation and digitisation, GST would help in curbing corruption. Critics opine that though the idea is noble, its execution left a lot to be desired. There were far too many rates and both small and medium traders as well as the consumer would suffer hardship due to the hasty implementation.

The GST rates are set at 0%, 0.25%, 3%, 5%, 12%, 18% and 28%. An additional cess takes it up even further. The gems and jewellery trade had been advocating a 1.25% rate for gold and 0% for exports. There was market speculation of 4% GST on gold for many months, however, it transpired that while some states (like Kerala who already had VAT of 5%) in the GST advocated a 5% rate for gold, others like Maharashtra and Gujarat (manufacturing states) advocated a 2% GST

Ultimately, the GST Council settled on a rate of 3% for gold and gold jewellery. The trade was also worried about a possible GST of 18% on labour charges; however, the GST Council settled on a 5% rate on labour charges. The diamond industry was greatly disturbed by a 0.25% GST on imported rough diamonds. The Gem & Jewellery Export Promotion Council (GJEPC) is still trying to convince the government that it is a retrograde move, and that any refund for exporters not only delays matters, but increases costs as well.

Moreover, it would needlessly put additional compliance burden on exporters. Finally, all imports into Special Economic Zones (SEZs) will not be charged any GST, but elsewhere, import of rough will attract 0.25% tax.

There was great confusion initially when unsorted rough diamonds (around 60% of all rough imported) were slated to attract 3% GST. But, representation by the GJEPC among others saw a clarification that 0.25% would be the GST for all imported rough diamonds. The 3% GST is only on industrial diamonds.

It is a fact that the gold trade was forced to eat humble pie over the excise issue last year. So, even though the trade may have felt strongly about a 3% GST and wanted to stick to their demand for 1.25%, there was very little that they could do anything collectively about it. Their demand for lowering of import duty, too, has been shelved till the next budget at least.

What is quite evident is that therate of tax on gold, import duty 10% plus excise 1% and VAT 1-1.2%, around 12.2%. Therefore the GST, though slightly above the pre-GST rate, is much below the 5% proposed by many states. government tried to maintain the pre-GST

In fact, the economic advisor to the Government of India wanted an 18% GST on gold. Others even advocated the highest tax slab for gold. But, the sword of Damocles does hang over the gold trade as far as higher GST is concerned. So, any hopes of lower tax rates are dashed for the moment.

One could well see a lowering of import duty next year coupled with a rise in GST. Thereby, maintaining revenue neutrality but increasing the domestic tax base.

GST is being touted as a single tax for the entire country; however, the multiple tax rates and the additional cess levied by the government have slightly altered it from the way it was originally envisaged.

Already, there are a few instances that have come to light. GST saw the price of a number of cars come down, but then the government promptly increased the motor vehicle tax. In other cases, consumers were asked to pay GST over and above the MRP on stocks prior to July 1st. Such instances affect the hapless consumer.

Some experts warn that GST would polarise the trade into those who are registered and those who are exempted or come under composite rates. For, the way the GST tax system works, one gets tax credit only if all in the value chain pay the tax. Therefore, logically, GST-registered players would prefer to do business with only registered players as they would not like to complicate matters by dealing with unregistered players.

Bullion imports could see a change in the functioning of foreign suppliers (banks, direct importers, etc.). Anyone who controls goods in India will have to register. Therefore, consignment imports may not be the same as before. One cannot not register and still control imported goods in India. Therefore, costs could increase on account of compliance procedures. Either you are in the business of importing goods or you are out of it.

INDUSTRY REACTIONS

The government’s game plan is fairly evident now. With demonetisation it sought to squeeze out black money from the system. Then, the push towards cashless Rough diamonds have been kept out of the purview of taxes even in various Asian countries which are globally competitive. In sync with the Prime Minister’s directives, gems and jewellery exporters have to focus on the big picture of making India a global diamond hub and popularise Indian jewellery across the world rather than get entangled in procedures for refund. It is difficult for gems and jewellery exporters to pay tax of 0.25% and then initiate process for refunds, etc.

For a segment wherein 95% of the output is exported, and, whose global footprint is under constant stress from other competitive economies, an upfront levy of GST on rough imports, which was hitherto exempted, would invariably cause a major setback to the trade and impact India’s significance in the global markets. Owing to the thin margins in the segment, each business will have to re-evaluate the viability of conducting the cutting and polishing activity in India, in light of the extent of strain GST would bring on its working capital, and, eventually, this may lead to significant volume of flight of capital and employment to other jurisdictions.

With respect to 0.25% GST on rough diamonds, Council feels that taxing diamonds is a retrograde step and not in sync with equivalence policy. Diamonds are key raw materials for gem and jewellery exports business.

We request the government to reconsider its decision of taxing rough diamond imports under GST, owing to such severe repercussions.

We welcome the government’s move of keeping a GST rate of 3% on gold and jewellery and this is in line with our representations and recommendations.

With regard to implementation, we also urge the government to grant the following:

1. Transactions carried out through the Diamond Dollar Accounts (DDA) should be nil-rated
2. Local transactions in respect of rough as well as polished diamonds, for the purpose of or in furtherance of exports, should be exempted from GST
3. Import of gold, platinum and silver as input (from the nominated agencies/ banks/foreign buyers) for the purpose of manufacture and export of gold/platinum/silver jewellery should be exempted from Integrated Goods & Services Tax (IGST) and GST, against provision of bank guarantee, in terms of the prevalent Central and State schemes.

This is a landmark day for the jewellery sector as the government rightly kept the overall tax burden low in the industry, keeping in mind the unique characteristics of the gems and jewellery sector, the kaarigars and small jewellers.

The declaration of GST for the gems and jewellery sector at 3% for gold articles and polished diamond and 0.25% on rough diamond is a very positive move by the government. It will give a thumping boost to the organised players and organised trade, it is also a boon for the consumer. Furthermore, the government will also benefit as more and more players will turn towards organised trade by complying to GST. Currently we feel it is a win-win for everyone.

The government’s decision to apply 3% GST on gold is an encouraging step in the current context to stabilise the industry and address the concerns of the millions employed in the industry. This may be an opportune time for the government to cut the import duty and bring down the total tax on gold significantly lower so unauthorised imports are totally eliminated and industry embraces transparency in letter and spirit under GST

Well , 3% will not cause any disruptions and we are glad that it did not fall in the 5% slab. This bill is welcomed by the industry and will not impact consumer sentiment in any way though there is a possibility that the cost to the jeweller may increase. I am yet to study the bill in detail and its implementation. However, gems and jewellery industry being one of the growth sectors, this is a good slab.

It is really good to see that the government has been considerate towards the gems & jewellery industry and put it under the 3% slab. This will have a positive impact on the sector and encourage it to be more streamlined. Consumers and jewellers will take the first few months to adapt to the new rule but once that phase ends, the market will stabilise. We think this new bill will bring about stability in processes and create a level playing field for businesses in the industry.

I’m happy at the understanding and maturity that the government has shown towards the jewellery segment. Now we jewellers have to reciprocate by embracing GST and the special treatment given to us. I do want to thank GJF for working tirelessly for the industry and making this possible.

Currently, the industry pays taxes around 2 to 2.5%, so 3% is almost as good as no impact by the taxes. The gems and jewellery sector is an unorganised space and a lot of players are in the rural regions too. With this taxation, many unorganised players will be encouraged to enter the organised trade. We are yet to study how the input tax credit would work and will plan our strategy accordingly. Overall, the bill does not seem to have an inflammatory impact as most of the rates are revolving around the current tax brackets.

The new GST tax rates would spur growth and help organise the jewellery industry. Additionally, the rates would promote transparency in the industry. One of the concerns over GST is it may make India’s diamond exports less competitive on the global market in terms of price because some Asian countries including Thailand, China, Sri Lanka and Vietnam do not levy GST on imported rough diamonds.

WILL GST IMPACT CONSUMPTION OF GOLD OR CURB IMPORTS?

Last year, the imposition of 1% excise duty as well as demonetisation saw gold consumption and import of gold fall quite sharply. So, will GST also impact gold imports as well as cause a decline in consumption of gold? Since, there is no sign of disruption of business in the jewellery trade so far, the consumption of gold would be based on the normal factors that impact it.

However, there is a possibility that the gold consumption numbers could show an increase as reporting improves. A better tracking system – matching every input with the final output – could make it difficult for the trade to be unofficial.

Moreover, one does not stop doing business just to avoid paying taxes. But, there could also be instances where sections of the trade go completely under the radar. However, it may not be as easy as before and it could lead to some players quitting the bullion trade altogether. It can take some time before one can make an estimate based on the above factors.

economy was also an attempt to curb cash transactions in the country and thereby stem generation of black money. Further, GST has been introduced to make all transactions virtually online with stringent compliance measures, thereby trying to make it very difficult for the trade to make adjustments towards the end of the year or under- or over-invoice their transactions.

The intentions are very noble and laudable to make India free of corruption and black money. However, the implementation leaves a lot to be desired. The premise is that the informal, unregistered or small and medium sectors or the cottage industry are not wanted. They have virtually no place in the system.

Likewise, henceforth, cash has very little role to play in the economy. However, the fact is that agricultural income is tax free. And successive governments have actively encouraged the cottage industry and the small to medium enterprises. They deal mainly in cash. True, all these facilities have been misused by bigger players masquerading as small players or farmers. But, they have the resources and connections to circumvent the system even now.

Even demonetisation somewhat failed in its stated objective of flushing out black money. Although it almost got all the money back with the banking system, it could not write off any significant liabilities. Moreover, the Jan-Dhan accounts meant for the poor in rural and urban India were misused by the rich and powerful in the country. The ones who were to benefit from these bank accounts were the ones who bore the brunt of the hardships caused by demonetisation.

The government appears to be determined to curb consumption of gold, particularly as an investment option. The modern economic thinking that gold is a dead investment appears to be firmly ingrained in the bureaucratic mindset. The same thinking had seen the imposition of the obnoxious Gold Control Act that was in vogue from around 1962 to1990. This Act was repealed in 1990 by Madhu Dandavate only after a looming balance of payment crisis was averted by pledging around 90 tonnes of gold to the Bank of England. It finally led to the most comprehensive and bold economic reforms by the then FM.

However, the Current Account Deficit (CAD) crisis in 2012 saw the then government imposing fresh curbs on gold consumption. It was felt that the crisis was a result of excessive import of gold at very high prices. The investment demand for gold worldwide rose sharply on account of the gold price scaling over $1,926 per ounce in September 2011. At first, India increased the import duty to 10% in stages and initiated the 80:20 import-export scheme. It also banned import of gold coins.

In spite of the gold price easing and the CAD crisis being a thing of the past, the current government continued with the policy of restricting import of gold. The government even introduced a few schemes a couple of years ago to curb import of gold. However, the Sovereign Gold Bond Scheme, the Gold Monetisation scheme or the gold coins were not successful in curbing gold imports.

The GST, too, does not permit easy consumption of gold coins or bars by putting the onus of paying the GST on the gold jeweller/retailer, should he procure gold coins/bars from unregistered dealers (read common investor). The 3% GST coupled with 10% import duty as well as 5% GST on labour charges makes gold far more expensive and less viable as an investment option.

Gold detractors should remember the fact that it was gold that helped India tide over its balance of payment crisis in 1990. Then during the1996-97 Asian currency crises, India was virtually unscathed as it stayed insulated as Indians’ affinity for gold over the ages meant that individuals hoarded gold. Unlike in 1991, when the Soviet Union was dissolved with almost no gold in its official vaults against an estimated 1,000-1,500 tonnes before the break-up of USSR, India’s case is different.

An estimated 18,000-25,000 tonnes of gold is hoarded by Indian households and religious places. Therefore, in any external crisis, gold with individuals helped them tide over. In rural areas, the farming community typically bought gold/silver from their proceeds of harvest and sold them to buy seeds or tide over a poor monsoon. This mode of savings became a norm as banking penetration in India was very poor, it still is not anything great! As a result, a major portion of the Indian economy remained insulated from external financial crisis. India was able to overcome even the 2008 Lehman Brothers-induced global financial meltdown partly due to its hidden strength of gold reserves with individuals.

Since 2012, Indian authorities have abhorred investment in gold, particularly in bars and coins. But, what escapes them is the fact that most of gold jewellery buying always has an investment motive. With higher import duty of 10% coupled with excise duty and VAT, gold buying was always an expensive proposition (around 12.1%-12.5% at least), for investment buying of gold. It made smuggling of gold viable again in the last few years. However, the benefit of such cheap gold was available only to dealers and manufacturers but not the investors per se. Post GST, this has become more expensive around13%-14% (including 5% on making charges) as compared to around 12.2% earlier.

Therefore, over a period of time, for the farming community (since 2012), gold is becoming increasingly unviable as an investment option due to higher taxes. Even otherwise, gold was affordable to the farmer with the price averaging around R5,400 per 10 gm in 2003. This price rose to R5,900 in 2004, R6,300 in 2005, R6300 in 2006, R8,800 in 2006, R12,100 in 2008, R15,000 in 2009, R15,000 in 2009 and rapidly to over R28,000 in 2012. It has since remained around that number with R27,000 last year.

Moreover, with the higher incidence of taxes, currently over 14%, the farmer has virtually no safety net to fall back upon as he cannot buy and sell gold to tide over any crisis as was the case in the past. His purchasing power has not kept pace with the rising gold price. The higher tax incidence takes gold further out of his reach. As a result, he is left at the mercy of the unscrupulous moneylender. For, access to a bank loan is not easily available to the small farmer. Loan waiver is available only for bank loans and not for loans from moneylenders. Thus, some of them cannot cope with pressures of mounting loans and dwindling incomes and commit suicide. Is it a mere coincidence that farmer suicides have increased in the last decade or so when the farmer’s traditional saving option of gold is getting out of his reach, due to higher gold prices and higher taxes?

Gold consumption from rural India could be still high as it may be bought by the richer rural folks. It is too premature to link farmer suicides with availability of gold at affordable rates, but that could be the topic for some serious research.

The government appears to be in a great hurry to push through its agenda. Last year, it rolled out demonetisation on an unsuspecting nation on November 8th. Then, it supplemented it with cashless economy, virtually sending a directive that cash payments would be greatly restricted and payments were to be made through credit/debit cards and mobile apps. The government even launched a few payment apps of its own and even linked them to the Aadhar card. Now, with GST it is trying to control the way a business ought to be run. Through GST, it wants the businesses to be virtually online with computerisation being mandatory.

The Indian government has rushed headlong into several initiatives almost at the same time at breakneck speed. It appears that no allowances have been made for any glitches, obstacles or roadblocks. What may appear to be theoretically easy could spring up practical issues. But, the tendency is to ride roughshod over any objections or concerns. But, whatever may be the pros and cons of this approach, one can only hope that GST is successful with minimal collateral damage. There is far too much at stake for the nation as a whole. India simply cannot afford a failed GST!