Today we will be discussing about nitty- gritty of GST and its rate impact on the India's gold market.
The tax on gold is set to increase from 1st July 2017. Prior to GST being implemented, the overall tax rate on gold jewellery stands at 12.2%. This is made up of 10% customs duty, 1% excise duty, and 1.2% VAT.1 GST replaces the excise duty and VAT components, but sits on top of the import duty. The headline gold rate of 3% announced on 3rd June has been welcomed by the industry, as it is significantly lower than many had feared. And, on the face of it, represents only a modest tax increase.
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It doesn't mean that all throughout the rate will be 3%. When we delve a little deeper, the effect of the tax is a little more complex. 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. Taking these two rates into account, our analysis of the supply chain indicates the effective tax rate consumers face could increase to between 13.5 -14%. This range depends on whether the jewellery is manufactured in-house or is outsourced. Firms manufacturing jewellery in-house will have an advantage.This, however, overlooks the broader tax efficiencies GST will bring. A key benefit of the new regime is that a firm can offset the tax it pays against its revenues using input tax credits.Any tax efficiencies gained in the supply chain will be passed on to the consumer. One might be concerned firms could use input tax credits to fatten their margins. But anti-profiteering legislation will ensure this is policed, and that firms pass on the benefits to the end consumer.
Consumers currently get a bad deal. The industry is highly
fragmented, dominated by small independent retailers where
under-carating is rife. While most analysts think of India’s
jewellery market as being dominated by 22k, the reality is that
most of the jewellery sold has less gold in it than advertised.
GST will bring greater transparency to the supply chain, and bring
more of the gold market into the formal sector. We expect this to
make it harder for retailers to under-carat their customers.
Learn more on GST with GST EXPLAINED
Recycling at risk:
GST could also affect India’s large gold recycling market. Selling gold to a jeweller is now a taxable transaction, for which the jeweller is liable. The jeweller pays the tax which is offset by the input tax credit they receive. This will make this part of the market more transparent. But this transparency may come at a cost. The tax authorities will know who has sold gold and how much they have sold. It will be interesting to see how consumers and retailers respond. This part of the market might clam up. Or some consumers and jewellers may try to conduct the transaction under-the-counter so it does not get captured by GST.
Learn more on GST with GST EXPLAINED
In some instances, firms may have valuable working capital tied
up. As explained above, under GST the inter-state stock transfer
will be taxable. In this example, 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.
Artisans – individuals or small collectives who hand-work intricate
pieces of jewellery for larger manufacturers – fall outside the
current tax rules. Under the new rules, however, artisans with a turnover north of Rs 2m per annum will need to become GST registered.
On top of this, jewellery made by artisans
subcontracting for larger manufacturers from another state would
be treated as inter-state supply and subject to IGST, even if the
artisans do not reach the turnover threshold of Rs 2m per annum.
This may not be feasible for small-scale craftsmen
Industry has reacted positively to the 3% GST rate. There had
been fears it could have been higher – perhaps 5% or more. This
would have had a damaging effect on consumer demand and,
more importantly, would have meant many small, independent
retailers would have done their best to avoid it. The 3% rate is
viewed as being more manageable and will ensure greater
compliance by small and independent retailers. Commenting on
GST, the All India Gems and Jewellery Trade Federation (GJF)
Chairman, Nitin Khandelwal said, “…we welcome the
government’s decision of 3% GST for gold. We are happy that
the Centre has created a special category, which will help the
industry.”
Large organised retailers should be especially pleased. It will
make their operations more tax efficient and put them in a
stronger position to gain market share. On the first day of stock
market trading after the GST announcement, listed jewellers
outperformed the broader equity market by an average of around
6%
Gold exports may receive a boost. GST has been designed so it
continues to support special economic zones (SEZs). Firms
operating within SEZs are entitled to bring goods from the
domestic tariff area (DTA) or from abroad without paying IGST.
This will ensure working capital is not tied up for firms based in
SEZs. A fast and efficient tax refund process – the government
promises to rebate 90% of claims from firms in the DTA within 6-
10 days – coupled with tax exemptions for SEZs, could encourage
exports and enhance Prime Minister Narendra Modi’s Make in
India initiative.This incentive may increase further. GST will replace both the
excise and countervailing duty, further increasing the tax
differential between doré and bullion imports, but levelling the
playing field between refiners in EFZs and the DTA. Doré imports
could boom and bullion imports could collapse. This would be
very positive for refiners across India. The big question is whether
the authorities will announce further tax legislation to remove this
incentive.
In summary, GST represents a radical step forward for India’s
economy. While it could present short-term challenges to the
gold industry, we believe it will boost the economy and make the
gold industry more transparent to the benefit of gold buyers. This
should support India’s gold demand, which we expect to be
between 650-750t in 2017, rising to 850-950t by 2020.
Source: CBEC, Surana Corp, World Gold Council
Learn more on GST with GST EXPLAINED
Existing Scenerio V/s New Regime (GST)
The tax on gold is set to increase from 1st July 2017. Prior to GST being implemented, the overall tax rate on gold jewellery stands at 12.2%. This is made up of 10% customs duty, 1% excise duty, and 1.2% VAT.1 GST replaces the excise duty and VAT components, but sits on top of the import duty. The headline gold rate of 3% announced on 3rd June has been welcomed by the industry, as it is significantly lower than many had feared. And, on the face of it, represents only a modest tax increase.
Learn more on GST with GST EXPLAINED
Analysis:
It doesn't mean that all throughout the rate will be 3%. When we delve a little deeper, the effect of the tax is a little more complex. 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. Taking these two rates into account, our analysis of the supply chain indicates the effective tax rate consumers face could increase to between 13.5 -14%. This range depends on whether the jewellery is manufactured in-house or is outsourced. Firms manufacturing jewellery in-house will have an advantage.This, however, overlooks the broader tax efficiencies GST will bring. A key benefit of the new regime is that a firm can offset the tax it pays against its revenues using input tax credits.Any tax efficiencies gained in the supply chain will be passed on to the consumer. One might be concerned firms could use input tax credits to fatten their margins. But anti-profiteering legislation will ensure this is policed, and that firms pass on the benefits to the end consumer.
Impact on Consumer:
Learn more on GST with GST EXPLAINED
Recycling at risk:
GST could also affect India’s large gold recycling market. Selling gold to a jeweller is now a taxable transaction, for which the jeweller is liable. The jeweller pays the tax which is offset by the input tax credit they receive. This will make this part of the market more transparent. But this transparency may come at a cost. The tax authorities will know who has sold gold and how much they have sold. It will be interesting to see how consumers and retailers respond. This part of the market might clam up. Or some consumers and jewellers may try to conduct the transaction under-the-counter so it does not get captured by GST.
Learn more on GST with GST EXPLAINED
A more efficient supply chain:
Firms across all product categories are re-jigging their supply chains in response to GST. Overall, supply chains are likely to become more efficient. This is true of the gold industry. Under the current tax regime, for example, inter-state sales of jewellery attract an irrecoverable central government sales tax. To avoid this, firms have set-up warehouses in states where they conduct business so sales are booked intra-state, rather than inter-state. This is inefficient. Businesses often have multiple warehouses across India, with high logistical costs and they often hold excess levels of inventory.Challenges:
Outlook of Industry over GST:
Impact on Gold Exports:
Summary:
Source: CBEC, Surana Corp, World Gold Council
Learn more on GST with GST EXPLAINED
Impact of GST on India's Gold Market
Reviewed by Author
on
June 09, 2017
Rating:
Reviewed by Author
on
June 09, 2017
Rating:
