CA Pulkit Kapoor

CA Pulkit KapoorThe Gems and Jewellery sector plays a significant role in the Indian economy, contributing around 6-7 per cent of the country’s GDP. The consumption of gold in India is around 20 percent of global consumption, one of the largest consumer. Moreover, India exports 95 per cent of the world’s diamonds.

The Gems and Jewellery Sector, being one of the largest sector of Indian economy, the products of which attracts the people from around the world is now trying to attract the attention of policy makers and persons engaged in implementing Goods and Services Tax (GST) so as to keep tax rates under GST close to current regime and to have simplified procedures.

At present, gold attracts import duty of 10%, around 1% value added tax (except in Kerala, where the VAT is 5%) and 1% excise duty. In Rajasthan the composition VAT rate of 0.75% on jewellery is without any limit, therefore benefit of composition scheme can be availed by all traders. In GST regime the benefit of 1% is also available under Composition Levy but at present there is a turnover limit of Rs. 75 Lakhs for availing this scheme. Considering high valuation of items in Jewellery Industry the limit of Rs. 75 Lakhs seems not practicable for jewellery sector. Therefore as an effect of this almost all of the jewelers have to register themselves under normal scheme, which itself brings a plethora of compliances with it. The concept of being a part of the credit chain and passing on credit (along with the compliances to be made in this regard) is being seen as an additional burden and thus creating apprehension in the industry. The taxman would surely not want a repeat of the last year strike (which was called by the jewelry industry on the excise issue), and hence currently representations from the industry were being welcomed by the department. Through the great efforts and constant representations of the various gems and jewellery associations in the country, the rates have been chalked down to 3% in case of jewellery items and 0.25% in case of rough of diamonds and other precious and semi-precious gem stones.

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Another issue that is a point of major discussion in the industry is regarding the credit of the existing stock (which as in turn brought under composition scheme). The transition provisions clearly law down the provisions when the inputs have been purchased from a dealer who would have paid tax under normal scheme, however since the entire industry is practically covered under the composition scheme, a clarity is awaited whether the said transition provisions are applicable on such transactions as well.

Further another issue which Industry is facing is of making charges. A section of jewelers considers making charges as a service charge and shows this separately while billing. Another section of jewelers, however, adds making charges in value of the jewellery; they do not show it separately but add it to the price of gold. The practice of considering making charges separately results into higher outflow from the pocket of the customer. This issue some what seems to be resolved through valuation provisions under GST law. As per Section 15 of the Central Goods and Services Act, 2017 (CGST Act) the value of supply of goods will be the transaction value. Further the value of supply will also include any amount charged for anything done by the supplier in respect of the supply of goods at the time of, or before delivery of goods. The cumulative reading of the valuation provision can lead to the interpretation that making charges has to be included in the value of goods in the GST regime and to be taxed as a composite supply.

The next point of consideration is for exporters. As one of the fastest growing sectors, the Gems and Jewellery sector is extremely export oriented. The provisions related to export in GST regime requires payment of tax on procurement of material used for exports and then claim refund, which will going to effect the working capital requirement of the exporters. As India is biggest exporter of diamond the provision related to export will going to have major impact on the working of diamond merchants. However the government has provided provision of Fast Track refund procedure where 90% provisional refund will be granted to exporter within a period of 7 days of receipt of  acknowledgement of making application of refund. This Fast Track refund provision somewhat reduce the effect of problem, but still will have impact on the working capital requirement.

Another point of consideration for Gems and Jewellery Industry is that of supply to tourists. As Indian jewellery is world famous there is huge sale to tourists throughout the country. The provisions of GST law provides that supply to a tourist will be treated as inter-state supply in all cases and not intra state supply and therefore IGST will be levied. This provision though provide benefit to tourists as they will be granted refund of the IGST paid, but on the other hand has increased compliance burden on the jeweler as one has to now check that whether the person purchasing jewellery is a tourist or not as per the provisions of laws as to charge the correct tax.

Moreover, the GST law also prescribes provision of E-way bill, which provides that the movement of goods, value of which exceed Rs. 50,000/- should be accompanied with an E-way bill. This procedural requirement is also troubling the Industry as the value of jewellery generally exceeds Rs. 50,000/- and the nature of Industry is such where there is movement of goods on daily basis in search of proposed buyers. This requirement of E-way bill now require daily generation of E-way bills and will therefore result in increased compliance on daily basis. Though this provision has been currently deferred till December, 2017 but if it is applied in the way and shape, the draft rules were floated, it is going to create a widespread chaos and a plethora of documentation to move goods through brokers and on approval. Since brokers and approval supply chain is the essence of the industry, this e-way bill is a simple “NO”for the industry.

The GST council has proposed multiple HSN codes for the gems and jewellery industry, consisting of 13 major codes with over 50 sub codes. This will also impact the Jewellery Industry as for an unorganized industry, it will be extremely difficult for over 80 per cent of the players to adhere to this compliance procedure. It will be a difficult task to maintain stock at the 4 digit level of HSN and potentially result in legal complications with the tax authorities.

Another aspect that needs to be considered that the entire industry be it gem stone cutting & polishing or manufacture of final jewellery is heavily dependent on the skilled workmen (Karigar). The said workmen generally work from their home along with their family and till date, in most cases have been out of the indirect tax net. Under the GST regime, such transactions shall have to be properly planned or structured (whether as supply from unregistered dealers or as job workers, etc) as the same would lead to increased compliances and blockage of working capital. If at all there artisans obtain registrations, then complying with such automated procedures would be a tremendous challenge for them and as a result may lead to denial of credit in the hands of the Jeweler. The rate of tax on such job work is @ 5%.

DISCLAIMER: The entire contents of this document have been developed on the basis of relevant statutory provisions and as per the information existing at the time of the preparation. Though the author has made utmost efforts to provide authentic information however, the material contained in this document does not constitute/substitute professional advice that may be required before acting on any matter. The author expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

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