CA Sunaina Bhatia

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The Jewellery sector plays a significant role in the growth of Indian economy. It is contributing around 6-7 per cent in the pool of country’s GDP (Gross domestic product). This is the fastest growing sectors and is extremely export oriented and labour intensive. It is creating a high degree of potential for the value addition and growth of the country. The Government of India has declared it a focus area for export promotion and to balance the current account deficit. India is deemed to be the hub of the global jewellery market due to low costs nature of our Indian economy.

India is the world’s largest gold consumer market, due to its jewellery sector which constitutes approximately 80% of total gold demand.  India has one of the highest savings rate in the world, estimated at around 30% of the total income out of which approximately 10% is invested in gold as per the economic research report. Rapid economic growth, urbanisation and inflation continues to stimulate gold demand in the country. Gold jewellery is a store of value as well as a symbol of wealth and status.For India’s population which resides in rural areas and do not have sophisticated banking system, gold is the second most preferred mode of investment other than the bank deposits.

Gold is having the positive relation in the demand and prices, due to its very nature i.e. it works against the law of demand. As per trade statistics, after crude oil, gold continues to be the second most imported commodity into India. This is primarily due to huge demand and not enough production within India.

At contemporary the import of gold from outside India to India attracts the Basic Custom Duty, Countervailing Duty and Special Addition Duty as per the prescribed rate. Further at the time of sale of jewellery, it attracts VAT in the range of 1% to 1.2%. There was no Excise Duty enforceable on the gold manufacturing earlier but from 1st March, 2016 onwards there is a new levy in the form of Excise Duty @1% (without input tax credit) or 12.5% (with input tax credit)on articles of jewellery (excluding silver jewellery, other than studded with diamonds/other precious stones). This move of the Government has been protested by the jewellers all over India.

In support of the levy of 1% Excise duty, Hon’ble Finance Minister Arun Jaitely said that the move was to align the rate of tax with the GST. He has further added that when items of common man are taxed, luxury items cannot be kept aside.Now a question arises that if the purpose was solely to align it with GST then why the VAT rate has not been increased instead of new levy.

By mid-2004, the State Governments were already at an advance stage of preparation for a switch over from the cascading sales tax to a VAT regime which was eventually introduced with effect from the 1st April, 2005. The VAT has two basic rates of 4 percent and 12.5 percent. There is an exempted category and a special rate of 1 percent for a few selected items. The items of basic necessities and goods of local importance are put under the exempted category. Special rate of 1 to 1.5% is applicable for Gold, silver and precious stones in different States.

Increasing the VAT rate by 1% could also have served the same purpose as against the 1% Excise duty. The reason of levy of Excise duty may be that Central Government wants to direct the funds to its own treasury.There are many more hidden taxes levied on the value of gold. It may be at the stage of importation or in the refinery process. These taxes becomes the inbuilt cost for the gold jewellery.In this consideration GST will definitely act for the betterment of the Gold Industry.

The proposed rate of tax for precious metals in GST regime seems to be more than the cumulative rate of taxes levied in the form of Excise duty and VAT. In case of import Basic Custom Duty would continue to be levied but CVD and SAD would be subsumed in GST. The overall impact would be minimal as against the present levies due to seamless flow of credit.

In the para 3.6 of the First Discussion Paper on GST, The Empowered Committee has decided to adopt a two-rate structure –a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items.

The Task force group recognizes that certain high value goods comprising of (i) gold, silver and platinum ornaments; (ii) precious stones; and (iii) bullions (hereafter referred to as “high value goods”) are prone to smuggling due to high tax incidence thereby generating negative externalities in terms of social and economic disorder. Therefore, it was recommend that dealers in such high value items may, subject to the threshold exemption but without the ceiling of Rs. 40 lakh (for the small dealers) also be allowed to opt for the compounded levy of one percent, each towards CGST and SGST.

In the recent report issued by the committee, on the ‘Revenue Neutral Rate’ for the GST, headed by Dr.Arvind Subramanian, Chief Economic Adviser, Ministry of Finance, (Chairman) has provided the rate for the different categories of goods and services to be levied under the GST regime as it is not possible to apply a single rate system in the county like India where there are huge differences lies in every part and parcel.

Hence, it is quite apparent that the GST rate in the range of 2% – 6% is expected to be levied on the articles made from gold. Taxing the precious metals to the upper limit of 6% would help in keeping the standard GST rate lower. Tax base and the rate of tax has inverse relationship. Higher tax base would surely reduce the rate of tax to come at par with the proposed RNR. It would be better to maximise the tax collection from the luxurious goods rather than the day to day normal goods.

Gold associations like Gems and Jewellery Trade Federation is also in unison with the Government’s plan for the implementation of GST. But it has to be noted that such associations are expecting a GST rate of around 1%, which can be a concern for the industry.

It is of paramount importance that gold jeweller should come under the ambit of GST to get rid from the various non-adjustable input taxes which generally becomes the cost of the final products. The Government has recently undertaken various measures to promote investments and to upgrade technology and skills to promote ‘Make in India’ and ‘Ease of doing business’ and GST is the only mantra to stimulate all these.

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