Impact of GST on Bullion Market

Introduction to GST

What is GST ?
Goods and Services Tax (GST) is an indirect tax applicable throughout India which replaced multiple taxes levied by the central and state governments. It was introduced as The Constitution (One Hundred and First Amendment) Act 2017, following the passage of Constitution 122nd Amendment Bill. The GST is governed by a GST Council and its Chairman is the Finance Minister of India. Under GST, goods and services is taxed at the following rates, 0%, 5%, 12%, 18%, 28%. There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. Also a cess of 15% or other rates on top of 28% GST applies on few items like aerated drinks, luxury cars and tobacco products.

Implementation of GST
Indian government’s initiative to implement GST might not be completely accepted by all the factions of the society. Although, it has been seen as biggest fiscal reform, gold consumers would have to pay higher taxes which will reduce the demand of the commodity in the short-term. The period of adjustment will impact the gold industry adversely hitting the bottom-line. The tax on gold increased from 1st July 2017. Previously, the overall tax on gold jewellery stood at 12.2% which was 10% customs duty, 1.2% VAT and 1% excise duty. In the current scenario, GST replaced the excise duty as well as the VAT components. But it now sits on top of the import duty.
Major changes from Bureau of Indian Standards might be pushing the industry towards mandatory hallmarking that would help the consumers in trusting the gold they would buy. It makes things clear – India is becoming an organized market with more transparency and GST will speed the process in the country.

There are complexities once we look deeper into the system. Two important GST rates would now impact the industry. The first being 3% tax on gold products that includes jewellery and there would be 18% tax on services that would be levied on individuals and firms that provides services in the gold supply chain.
Given the above scenario, the supply chain analysis indicates consumers could face an increase of tax between 13.5 -14%. Again, this would depend on whether jewellery has been manufactured in-house or has been outsourced. In-house jewellery manufacturers will have greatest advantage.

Demand for gold might slow down
The impact of GST might impact the unorganized sector, wherein more than 300,000 jewellers are seen operating in the country. With this, there might be an adverse impact on the employment generated by the sector that includes –artisans and laborers who are directly or indirectly work for the sector – numbers running into millions.
Households who are generally classified in terms of their income from agricultural based out of the rural parts of the country spent nearly 30 per cent of their income on durable goods. Nearly, 30 per cent of this spending has been on gold jewellery. With the current higher tax regime, the demand for jewellery might hurt significantly.

Investing in Physical gold to take a hit
The Goods and Service Tax (GST) Council provided 3 per cent GST to gems and jewellery sector. Although, traders expected a higher tax, this is generally in line with what was under the old tax regime. In all this, GST has manifold increased the paperwork together with the compliance aspect. Consumers will now be a little wary of investing into gold given the increase in the taxes, thus analysts predict downsize in selling the commodity in the market place. The transaction impacting the cost increased from 1% to 3%. While,
the government might be pushing towards investing in sovereign bonds, they might be influencing the consumers from investing into physical gold.

Export might also witness downfall
There is no exemption provided from GST for gold that is procured for the purpose of exports. Thus, this guarantees blocking of working capital by the traders. With this, it is expected that the exports will witness a downfall. In such a case where gold – raw material – supplied by overseas buyer and Indian party makes the jewellery, and then exports it – design together with labor will witness a tax impact.
Together with this, overseas customer would have to register as a non-resident business and undertake entire paperwork. This might keep a lot of people out of the system.
And this might also witness a disturbance in bullion imports system. Many international suppliers that include bullion banks who send goods on consignment into the country would have to register as a non-resident business. This might deter suppliers from operating in the country.
Higher illegal trade to emerge
The imposition of higher tax in the bullion market may lead to higher incidence of illegal gold trade opine industry experts. Also, they said bringing the unorganized sector under the tax regime will be a huge challenge. India has exported gems and jewellery which was worth INR 2.89 lakh crore in the year 2016-17 that was an upsurge of 12.32% from the previous year. Post GST regime, the challenge would be that manufacturing – nearly 90% of gold jewellery – is made in the unorganized MSME sector and these traders have to comply to the infrastructure, which will be a huge challenge.
Impact on Small traders
Unclear scenario for the small traders in the market is likely to impact the revenue of the sector. With traders not clear about issuing tax invoice in tier II cities – who have been mandated to provide receipt incase of sale above INR 200. The entire scenario will now become a little hazy for them. They might also stall their import and buying from the international market – given the fact that that might also incur taxes. The compliance cost for the small traders will be daunting. Given the fact that 60% of the companies in India have not adapted to computerization of their business, coping with such a scenario will be hard for these smaller businesses in India.

Positive Outcome

Likely growth in the organized sector
Organized sector might witness growth as they remain transparent with their transactions. Although, they will be also burdened with higher tax – the consumer demand for the commodity will take a hit with hike in prices. As per the previous survey conducted by National Sample Survey Office (NSSO) household expenditure on jewelleryand gold accounts for 17 per cent of the spending on durable goods. In case the demand for jewellery getsimpacted negatively, consumers might route their money into other financial investments thus, limiting buying of gold in the market.

Middle East traders gain in the short-term
Gold dealers from UAE –United Arab Emirates – opined that the change of policy might boost brief rise in demand for buying gold since the rise in price has been expected after government has implemented GST. Given the rise in the price of gold because of GST, UAE’s jewellerymarket would emerge as an attractive market in comparison to India as per the analyst from the sector. However, they also said that this demand might be a short-lived affair. Apparently, UAE as well as other Gulf states might be looking at levying 5% GST in their own countries might come into practice in the month of January next year.

Positive reaction from the large traders
The large traders reacted in a positive way. They opined that compliance will ensure transparency in the sector. Large retailers would be happy to provide all the information and come under an organized market. This would make their operations tax efficient and get them into stronger position for gaining market share.

In Conclusion

Although, it has been brought to notice that GST might be disrupting the market in the short term as the industry will have to adjust to new tax regime. Retailers’ and manufacturers’ working capital could get blocked because of inter-state gold stock transfers. Adapting for the small-scale artisans as well as retailers might be a struggle.


Luxury cars get cheaper post GST!
With GST coming into effect from July 1, 2017 onwards, Luxury cars have become a bit more affordable.
Prices of Mercedes-Benz, BMW, Audi, and Jaguar Land Rover (JLR)are expected to decline up to 10% — or INR 10 lakh for the top-end models.
The change in prices will depend on each state, model and variant, and as per the tax rates that were applicable before the adoption of GST. Experts believe it may lead to increase in sales of luxury cars in the market, which has so far less than 2% market share in the passenger vehicle segment.

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