Budget 2022 – Expectations of Gem & Jewellery Sector

The Gems and Jewellery industry contributes to 7.5% to India’s Gross Domestic Product (GDP) and 14% to India’s total merchandise exports. The gem and jewellery sector is likely to employ 8.23 million persons by 2022, from 5 million in 2020. Based on its potential for growth, employment generation and value addition, the Government declared gems and jewellery sector as a focus area for export promotion. GJEPC recently announced an ambitious target of raising exports of the sector to US$ 44 billion in FY22. As a result, the Union Budget 2022 is keenly awaited by the industry and some of the key expectations are listed below:

1. Rationalization of GST Rate Structure & Grant of Refunds for Accumulated Input Tax Credit for Diamonds

Due to distorted rate structure, the accumulated input tax credit (ITC) under Goods and Services Tax (GST) is continuously increasing. The rate of tax on input services (ranging from 0.25% to 18%) used in G&J sector is significantly higher than the rate of tax on cut and polished diamonds (0.25%). The accumulation is already estimated to be over Rs. 1,000 Crores at a sector wide level according to a survey amongst the industry members. This can be addressed by the following measures:

a. Presently, the rate of tax applicable on job work services in relation to cut and polished diamonds is 1.5% and the rate applicable on gradation and certification charges for diamonds is at 18%. If these services are subjected to a lower rate of tax of 0.25%, the perennial problem of accumulation of ITC will be substantially addressed. Alternatively, at least the gradation and certification charges should be construed as job work and taxed at 1.5%.

b. Granting refund of Input Services under Inverted Duty Structure: As per provisions of Section 54(3) (ii) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017, presently the refund of ITC on input services cannot be claimed. The rates of tax on certain services procured such as gradation and certification charges, assortment, rent expenses are higher than the tax paid on outward supplies which results in ongoing accumulation of input tax credit. Therefore, refund of ITC pertaining to input services should also be made available and suitable amendments should be made. Also, a one time refund of the accumulated input tax credit should be allowed which has resulted due to the above anomaly in rate structure.

c. GST refunds: At present, it is observed that there is significant delay in processing of the GST refunds. Although law stipulates that the GST refunds should be processed at least provisionally (up to 90%) within 60 days of claim, ground reality is that the delays are much more significant. In this Budget we expect that as in the past there would be mega GST refund drives or some instructions for expeditious disposal of refund claims.

2. Equalisation Levy of 2% to be abolished for Diamonds

A large number of diamond mining companies and rough dealers are selling diamonds using e-auctions or e-tenders or other digital means outside India. In case the purchasers are Indian business entities, an equalisation levy of 2% is charged on such goods. The credit for equalisation levy is neither available under the GST law nor under the income-tax law and hence, it becomes additional cost. India is set to become true global leader for trading and manufacturing of diamonds with the existing Bharat Diamond Bourse at Mumbai and the commencement of new Surat Diamond Bourse. The equalisation levy reduces the global competitiveness of the Indian diamond industry as compared to other centres such as Dubai and Hong Kong and should be abolished.

3. Reduction in Import Duty

The import duty on precious metals such as gold, silver and platinum should be reduced from 7.5 per cent to 4 per cent; and on cut and polished diamonds, from 7.5 per cent to 2.5 per cent.

4. Sale of Rough Diamonds in Special Notified Zone

Presently, only viewing but not sale of rough diamond is permitted in the “Special Notified Zone” of Mumbai. The mining companies which import rough diamonds in the Special Notified Zones are required to ship the goods back after viewing and then the same are re-imported by the Indian businesses who had selected the goods resulting in additional costs and time without serving any useful purpose. 

5. Increase of Basic Exemption Limit from Rs.2.50 lacs to Rs.3 lacs

At present, the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act) provides for a basic exemption limit of Rs.2,50,000  for personal tax which has remained unchanged for several years. The diamond industry employs large workforce which is semi-skilled but has good income level. Given the current annual inflation rate of about 5%, higher cost of living and the time which has elapsed since last revision, it is expected that the basic exemption limit is increased to Rs. 3,00,000. Alternatively, the standard deduction for the salaried personnel may be increased from Rs. 50000 to Rs. 60,000 in case there is no increase in the basic exemption limit.

6. New Diamond & Jewellery Manufacturing Domestic Companies – Extension of Time

Section 115BAB provides an option to pay income-tax at concessional rate of 15% (plus surcharge and cess) to any new domestic manufacturing company incorporated on or after 1 October 2019 subject to certain terms and conditions. This benefit is available to companies which do not avail any exemption / incentive and commence their production on or before 31 March 2023. The time limit within which companies needs to commence the manufacturing operations which is presently on or before 31 March 2023 needs to be extended to 31 March 2025. This is due to the fact that several manufacturing projects have got delayed due to pandemic. 

6. Employment related Tax Deduction – Section 80JJAA

Under section 80JJAA, deduction @ 30% of additional employee cost for 3 years is allowed as tax deduction in case of employees drawing salaries or wages up to Rs. 25,000 per month.  The limit of Rs.25,000 per month was introduced in 2016. Thus, it is advisable that the threshold limit of remuneration be increased to Rs. 50,000 a month from Rs. 25,000 per month keeping in view the increase in wage and salary levels since 2016 and the need to boost employment. 

7. Lower Rate of Tax for Partnership Firms and LLPs

Most diamond and jewellery businesses operate as Partnership Firms and LLPs. The tax rate applicable in case of partnership firms and LLPS is a flat rate of 30% (plus surcharge and cess) which effectively results in a tax rate of 34.94%. In order to bring them at par with the corporates and to incentivize the small and medium sized business which are operating either as a partnership firm or an LLP, the income tax rate applicable should be rationalized and brought down to 25% (plus surcharge and cess).