India’s goods and service tax to bring a shine to gold

The sales tax could improve transparency and accountability in India’s gold industry, which is plagued with illegal money flow. But until the sector adjusts, a high customs duty will not deter smuggling.

The tax rate on gold under India’s long-awaited GST will be 3 per cent. Rupak De Chowdhuri / Reuters

India’s new goods and service tax is expected to help polish up the country’s tarnished gold sector.

Jewellers and analysts say that the new tax regime, widely referred to as GST (the goods and sales tax), should help improve transparency and accountability in an industry in the country that is largely unorganised and plagued with problems of smuggling and illegal money flows.

“GST will bring back a lot of stature to the industry,” says Saurabh Gadgil, the chairman and managing director of PNG Jewellers and the director of the Indian Bullion and Jewellers Association.

“If you look at the industry as a whole in India, it’s always seen as non-transparent.”

He says that although the gold jewellery sector in India is a major contributor to India’s economy, it’s still perceived as a “village industry”.

Under GST, he says, it could move to being a sector that “is highly organised, where there are high levels of documentation and ethics”.

GST, due to be rolled out on July 1, is considered to be India’s biggest tax reform in decades. It will replace the country’s convoluted system of different taxes across its 29 states with a uniform tax system.

However, Mr Gadgil says that being compliant with the new regime would involve paperwork and technology, and some smaller jewellers could struggle.

“With GST coming in, everyone, either big, small, regional, national, has to now follow the established norms. This will get the entire industry standards up.”

For those who do not comply with the new tax regime, “you’ll be left out and there will be no space for you – you will be out of business”.

India is one of the world’s biggest consumers of gold, with demand for the precious metal, totalling 675.5 tonnes last year, expected to rise to between 850 and 950 tonnes by 2020, according to the World Gold Council. Gold plays a significant cultural and traditional role in India, including in weddings and religious festivals.

It is also used as an alternative to the formal banking system, with many households storing gold at home.

It has recently been revealed that the tax rate on gold under India’s long-awaited GST will be 3 per cent. There had been expectations that the GST rate for gold could come in much higher, at above 5 per cent.

“The new rates will improve the outlook for gold and gold jewellery sectors and also create new job opportunities,” says MP Ahammed, the chairman of Malabar Gold & Diamonds, one of India’s biggest jewellery brands, which also has stores across the Arabian Gulf region.

It will be essential for authorities to ensure compliance under the new system.

“The authorities should bring all categories of gold merchants, irrespective of their size and turnover, under the new tax net,” says Mr Ahammed. “This will ensure additional revenue to the government exchequer and eliminate malpractices.

“In short, the new GST rate for gold and allied sectors will bring much-needed relief for the sector.”

Gold is largely considered an idle asset in terms of its role in the economy.

Consequently, India in recent years has taken steps to try to curb imports of gold, including a series of increases on import duties, because it weighs on the country’s current account deficit. India has been trying to bring it into the formal financial system, by launching a sovereign gold bonds scheme, for example.

The 3 per cent tax rate will replace the current 1 per cent excise duty and an average 1.2 per cent value added tax, which varies across states, so it actually represents an increase of less than 1 per cent. A 10 per cent customs duty remains in place, however, for gold imports.

“Effectively, this would result in an increase in jewellery prices of gold, however marginal it will be,” says Prathamesh Mallya, a chief analyst at Angel Commodities Broking, based in Mumbai. “This additional cost will be passed on to the consumers.”

But analysts say that ultimately it will be consumers who benefit as the gold market moves into the formal sector.

“Consumers currently get a bad deal,” according to a report released by the World Gold Council this week.

“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. We expect this to make it harder for retailers to under-carat their customers.”

It says that GST “may be disruptive in the short term as the industry adjusts to the new tax regime”.

Meanwhile, it is India’s steep import duties that have fuelled the appetite for smuggling of gold. High duties are avoided by bringing gold into India via illegal channels.

About 175 tonnes of gold were smuggled into India in 2014, according to the World Gold Council.

Smuggled gold is often brought into India in flights from Dubai and Singapore, while the borders with Nepal and Bangladesh provide access points via land.

“While GST itself is a good development, when it comes to smuggling, the rate of 10 per cent duty and 3 per cent on top that, is high,” says Somasundaram PR, the India managing director for the World Gold Council. “The overall tax rates still remain at levels where smuggling is lucrative.”

He says that GST was certainly likely to help crack down on large number of unorganised players who have been operating without paying taxes.

But although it could go some way to reducing smuggling, the problem of illegal gold flows into India are likely to remain a problem until the high custom duties are reduced, he says.

“Under GST, you are going to get input tax credits if you buy from someone who has a bill and invoice, so GST will make it difficult for smuggled gold to flow in freely,” says Mr Somasundaram. “But for those operating on the fringes, just with cash and with absolutely no registration, it’s still lucrative. Smuggling will probably go a step away from the jewellery industry but it will still operate. Earlier the smuggled gold could more easily enter the mainstream industry.”

Mr Gadgil says that he is “hopeful” that once the new tax system is launched, the government will turn its attention to the import duty structure and reconsider those rates, which are encouraging smuggling.

The full extent of the impact of GST remains to be seen as it roll-out draws closer but Mr Gadgil says that he is certain that it is going to shake up India’s gold industry.

“There will be some people who wind up, you’ll see mergers and acquisitions, small players will come together and form a company together. Time will tell, but it’s imminent. Nobody can prevent it.”

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