About 75% of gold purchases in India as an investment option, Is GST impact on Gold?

About 75% of gold purchases in India as an investment option, Is GST impact on Gold?

By Mr. MP AHAMMED

The government has shown a positive intent by fixing the GST rate on gold and jewellery at 3% which is largely a win-win formula both for the industry and the government. Endorsing the arguments of some states for a 5% rate would have been fatal for the sector which contributes around 7% to the GDP and employs over 2.5 million people. 

Along the many positives, there are still some negatives too are lurking around. 

What now we need is a strong follow-up from the government with the same positive intent, so that a malignant `Kerala model' in gold trade does not proliferate across the country.

Kerala, the highest per capita consumer of gold in the country, let an undesirable model thrive on high tax rates. Against the average 1% VAT in all other states, Kerala charged a 5% VAT, prompting the unorganised players to go for unaccounted trade and indirectly pushing the smuggling of gold and thereby the shadow economy.

Some estimates suggested that 65% of the business were unaccounted and there was a huge leakage of tax. 

About 80% of the tax collected came from just a handful of top players whereas Kerala had over 5,400 registered dealers.

The GST on manufacturing can make India less attractive as a destination for cutting and polishing while the tax on selling old ornaments makes gold still a worse option as investment. 

But the biggest challenge before the government is to bring all categories of traders under the ambit of the new tax, as nearly 90% of traders are in the unorganised sector.

The sector has over five lakh players, but the majority are small traders. And 85% of the trade happen through the unorganised route. The upward change of 3% in the net price of the gold and the stronger compliance norms would prompt these unorganised players to take the unaccounted route. 

This, coupled with the risk of increased smuggling of gold, could percolate the Kerala model wider and farther across the subcontinent.

First, the government should now restrain its urge to revise the current GST rates upward in the first quarterly review meeting of the GST Council as some states are still persistent with their demand for a higher rate. 

Second, we need to revisit the customs duty of 10%, which is highly skewed against the interests of the consumers and the industry, especially given the fact that the average global customs duty is just 3.9%.

One of the most crucial follow-up actions should be the further promotion of e-governance which will help widen the tax net.

The industry is still not very clear about the standardised billing procedures as some jewellers show making charges separately and a few others include it along with the price. 

Again, a rethink over the tax now slapped on the resale value of gold should be a welcome move as some surveys suggest that 76% of gold purchases happen in the country as an investment option.

The implementation of GST has the potential to weed out a shadow economy which is denying the organised gold sector of its rightful profits.

In order to ensure that the benefits of GST reach manufacturers, jewellers and consumers, the government should take strong measures to ensure that the parallel economy is weeded out and unorganised players do not thrive at the cost of the organised sector. 

GST has the potential to position India as a global gold and jewellery sourcing hub and enhance its gold export productivity. But, caution is the watch word.

 From ET 

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