India’s Gem & Jewellery Export Promotion Council (GJEPC) is already warning that the country’s overall gem and jewellery exports are likely to decline by a whopping 30 percent, due to a combination of factors that include the imposition of unrealistic levels of goods and services tax (GST) on raw material imports.
The GJEPC has pointed out that the total value addition in the manufacture of gold jewellery is between 3.5 and 4 percent. This includes costs such as plant, machinery and labour. Actual profit is in the region of 0.5 percent.
However, a gold jewellery exporter has to pay a levy of 3 percent GST on the import of gold. This is many times the actual profit on the finished product and is held by the government for periods in excess of 270 days, while the manufacturer goest through the of fabricating and exporting the product and finally waiting for payment from the overseas client.
The impact of the new tax regime can be seen in the country’s export figures. A month before GST was introduced in the country, India’s $2.3 billion in exports of gems and jewellery for the month of June, were 13.3 percent below the $2.7 billion exported in June 2016. In July, after GST had been implemented, exports fell 26.2 percent to $1.9 billion, from the $2.6 billion recorded in July 2016.
The Indian government has also imposed a 0.25 percent GST on the import of rough diamonds. On top of this, a 5 percent GST is levied on the farming out of production or job-working. In addition to this, there is a 3 percent levy on every intra-industry transaction of polished diamonds. For small sizes, which typically change several hands as they are manufactured by small enterprises, this adds to a huge accrual of working capital —several billion dollars worth.
The GJEPC contends that in all other sectors, products and services, GST has been implement on the basis of a pre-existing levy. Rough diamond imports have hitherto been duty-free and the intra-trade movement of diamonds has never been taxed. GST on rough diamond imports and intra-trade movement has been imposed without a precedent.
While recommending a levy-free system like competing production centres like Antwerp and Israel, the GJEPC says that if the government still insists on a levy, it should come up with a workable system that imposes a uniform 0.25 percent levy on every intra-industry transaction.
Industry stakeholders have told GEMKonnect that the combination of the 10 percent import duty on gold bullion and the 3 percent GST, along with a ban on high-purity gold jewellery exports have had a significant impact on the practice of “round-tripping”. Round-tripping or circular trading, involves the export of basic “jewellery” like embossed medallions to a duty-free location, followed by the re-import of the same products as gold bullion for export production.
With jewellery exports to the UAE now attracting a 5 percent import duty in that country and imports from there being taxed, the Middle Eastern nation is no longer the focus of “round-trippers”. Attention had turned to South Korea, with whom India has a free trade agreement (FTA), but now overall circular trading is slowing down.
With all the factors taken into consideration, industry watchers say India’s gem and jewellery exports could easily drop even more than the projected 30 percent.