GST: Disruptive but beneficial
World Gold Council remains positive as tax rate lower than feared.
An assessment by the World Gold Council on the impact of GST on India's gold and jewellery industry suggests that while the new tax regime may be disruptive in the short term as the industry adjusts to the changes, it will introduce greater transparency in the business. This will be beneficial to consumers and all other stakeholders in the long run.
The Council feels that on the face of it, the additional tax burden imposed by the new regime may be modest and significantly lower than what the industry had feared. In fact, the industry has welcomed the new rate as positive.
But it says that upon deeper examination, the effect of the tax appears to be more complex. There are two significant GST rates which will apply to the industry. The first is the 3 per cent tax on gold products, such as jewellery. Besides, there is an 18 per cent tax on services that will apply to firms and individuals providing manufacturing services across the gold supply chain.
Taking these two rates into account, the Council's analysis indicates that the effective tax rate for consumers could increase to between 13.5 and14 per cent. This range depends on whether the jewellery is manufactured in-house or is outsourced. Firms manufacturing jewellery in-house will have an advantage.
According to the Council's assessment, a key benefit of the new regime is that a firm can offset the tax it pays against its revenues using input tax credits, eliminating double taxation throughout the supply chain. Jewellers, for example, will now be able to use input tax credits from any goods and services utilised in the process of selling jewellery.
While any tax efficiencies gained in the supply chain are expected to be passed on to the consumer, there are fears that the firms could use input tax credits to fatten their margins. This can only be tackled through an anti-profiteering legislation so that the firms pass on the benefits to the end consumer, the Council cautions and notes that there are still several areas where greater clarity is required.
The Council sees consumer behaviour changing in response to the GST. "Our econometric analysis spanning 26 years of data illustrates that higher taxes act as a headwind to gold demand. But the tax should also change the industry to the benefit of the consumer," it points out.
According to the Council's view, Indian 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. But GST will bring greater transparency to the supply chain, and bring more of the gold market into the formal sector.
The Council feels that this will make it harder for retailers to under-carat their customers. And separately, a slew of measures from the Bureau of Indian Standards is pushing the industry towards mandatory hallmarking, which will also tackle the issue of under-carating.
"The direction of travel seems clear to us: India's gold market is becoming more organised and transparent, and it is likely GST will accelerate this process. This should be good for consumers. They can have more faith in the gold products they are buying, and this, in turn, can support gold demand in the years to come," the Council says.
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, according to the Council, this transparency might come at a cost. The tax authorities will know who has sold gold and how much; so it has to be seen how the consumers and retailers respond.
There is a risk that some consumers and jewellers may try to conduct the transaction under-the-counter, so it does not get captured by GST, the Council points out.IPA
(The views expressed are strictly personal.)