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The long-awaited hype about the biggest tax reform in India was finally rolled out on July 1, 2017. Goods and service charges (GST) on gold stuck to a 3% rate. It is higher than the previous taxes which included 1.5% VAT and 1% excise tax. Although below the expected GST of 5%, processing fees of 5% and customs duties around 10% would continue to apply. However, the gold industry has also welcomed the GST tax of 3%. Let us assess GST's impact on gold demand in India and how this service tax has affected organized and unorganized gold operations.
Pre- and post-GST scenario in jewelry
Before GST, the jewelers used a 10% duty on gold, 1% excise duty and 1.2% VAT. This was 12.43% when buying gold jewelery and 11.32% when buying gold bars. In the latter case, the taxation was a little less, as the purchase of gold bars does not attract excise duty. With GST implemented at 3%, customs duty at 10% and 18% of the fees, the effective rate comes to 15.67%. Therefore, the effective price increase on gold jewelery amounts to 3.24%, which means that gold has become somewhat expensive for Indian consumers.
GST effects on gold consumers
GST takes a huge toll on the people who like to buy and make gold jewelry now have to meet a lot of compliance, with an increased amount of paperwork. The GST for jewelry and gemstones is 3%, except for rough diamonds, which is 0.25%. This has an immediate effect on reduced gold resale value. For example, if X buys gold worth Rs. 100, he will have to pay a GST of Rs. 3 and the total cost of purchase would be Rs. 103. Assuming that the gold price remains constant, after six months, if 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 effects have increased from 1% to 3% (approximately).
The government has recommended not investing in physical gold but rather giving the money in government gold. The consumer is likely to receive ROI on gold bonds as there will be interest coupons attached to it, as well as a tracking option for gold prices.
Gold trading with old jewelry for new ones has also been affected due to a transaction cost of 3%.
Even making new gold jewelery from scrap metal from customers also witnesses a drastic tax impact. Prior to GST, there was no tax effect on the manufacture of such jewelry, since fees (considered labor costs), are exempt from service fees. However, no such exception exists under GST, and according to new tax system it amounts to 18% GST. This is totally an undesirable effect.
Effect of GST on exports from domestic area
Other than SEZ, the domestic customs area has been hit by two bills:
First, since there has been no exception to GST for gold procured for export purposes, this would result in a higher blockage of working capital. Secondly, export operations have been negatively affected as there is added value in the form of labor and design.
Even for a foreign consumer, the necessary paperwork must be done to register as a non-resident business person. This would definitely deter many potential consumers. This would change most international suppliers, including gold banks, as they have to register as the foreign business to ship goods to India.
Impact on gold demand
As mentioned earlier, the small increase in the tax has affected demand. however, it does not gain much over 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. So it would be difficult to assess the full impact on demand now. According to GFMS data, gold imports rose 144% in the first five months of 2017 from 144% to 424.1 tonnes. This means that imports in the high season during the fourth quarter would be much lower. During the year, however, we could see a revival in demand, as consumers and industry adapt to the new environment.
Impact on jewelry trade
It is obvious that GST would be beneficial for the organized sector and brand retailers would have easier to follow the new rules. Nearly 30% of the jewelry industry is & # 39; disorganized & # 39; and they may face difficulties implementing and following the new rules. The organized and branded jewelers, who also have integrated manufacturing, can cut 18% GST on manufacturing. In addition, a structural shift towards organized trade is already underway and after demonetisation, the decline in cash transactions has accelerated the process. This would help the organized sector and not the unorganized, as they later trade more with cash. So, overall, although it may be some primary difficulty for the jewelry industry to follow the new rules, the branded goods and organized retailers would have an advantage.
To summarize the scenario, we GST is a positive step towards the right direction and for a period both consumers and industry would benefit with increased transparency. Although, due to a lack of detail, there are still fears in some areas, these would not affect much in the long run for jewelry. As for decades gold has served as a favored asset to the Indians, GST would not have any drastic negative effects.