India’s New GST: What You Need to Know, By Joshua Freedman
RAPAPORT... India’s much-anticipated goods and services tax (GST) took effect on July 1, drawing both praise and criticism from the diamond and jewelry industry. The tax — which Prime Minister Narendra Modi dubbed the “good and simple tax” — replaces a complex list of national and regional levies with one overriding system for taxing transactions.
However, analysts and industry players have noted that it’s not as simple as the government promised, sparking a debate on what its benefits are.
The trade has welcomed the new 3% tax on jewelry — including gold and polished diamonds — as many feared a higher rate. However, that replaces a 1% excise duty and 1% value-added tax imposed by individual states, meaning the industry will still pay more tax than it did under the old regime.
The government also introduced a 5% tax on manufacturing, which previously did not exist, while a new 0.25% tax on rough diamonds and gemstones has met with some criticism. The Gem & Jewellery Export Promotion Council (GJEPC) has labeled the tax a “retrograde step” and says it will harm India’s position in the global market.
“It may make India’s diamond exports less competitive on the global market in terms of price, because some Asian countries, including Thailand, China, Sri Lanka and Vietnam, do not levy GST on imported rough diamonds,” Mark Gershburg, CEO of grading laboratory Gemological Science International, argued Monday.
Analysts believe the trade will bear at least some of the brunt of the tax. Jewelry retail prices are expected to rise by about 1% as a result of the new system, according to Crisil, an Indian subsidiary of ratings agency Standard & Poor’s.
“The modest increase in the overall tax rate is not expected to impact demand,” Amit Bhave, director of Crisil’s credit-rating business, said last week.
The system will benefit the more organized jewelry retailers, which account for about a quarter of the industry, as their size will enable them to handle the tax more efficiently, Crisil argued.
“Better supply-chain efficiencies and enhanced transparency will provide an edge to the organized players and help them garner a higher market share over the medium term,” Bhave added.
In addition, smaller independent jewelers will be forced to keep formal accounts of their business, preventing them from engaging in common unscrupulous practices such as overstating the gold content in jewelry, the World Gold Council (WGC) said in a recent report. In that sense, the new regime represents a continued shift toward greater transparency in India’s economy, the WGC commented.
“India’s entire economy is on a rapid journey to becoming more organized and more transparent, boosting economic growth,” the group said. “This is vitally important for India’s gold market. Our econometric analysis reveals that income growth is the single biggest driver of gold demand in India.”
As the new GST goes into effect, there is still some uncertainty about what the rates are and who has to pay them. Here, Rapaport News sets out the key facts about how India’s biggest tax reform since independence will affect the diamond and jewelry industry, based on a document released by the GJEPC.
At least six national levies and seven state charges existed previously, constituting what the WGC has called a “labyrinth of taxes.” The government has merged all of these into three types: a central goods and services tax (CGST), a state goods and services tax (SGST) and an integrated goods and services tax (IGST). CGST and SGST apply to transactions that take place within one Indian state, while IGST governs imports and trades between states.
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