PRE BUDGET – RECOMMENDATIONS FOR THE GEMS & JEWELLERY INDUSTRY, 2023 – 2024

9th January 2023

Mr. Manoj Jha, MD, Kamakhya Jewels shares with us Pre – Budget Recommendations for the Gems & Jewellery Industry, 2023- 24. Major Points covered are Reduction in Basic Custom Duty of Gold, Gold Monetisation Scheme, Reduction in Rate of GST on Gems & Jewellery to 1.25%, Increase in Pan Card Limit, Cash Purchase Limit – Change in Section 40A of The Income Tax Act, EMI for 22 Ct. Gold Jewellery, & Relief from Capital Gain Tax

1. REDUCTION IN BASIC CUSTOM DUTY OF GOLD

In 2022, the Basic Customs Duty (‘BCD’) on the import of gold is increased from 7.5% to 12.5% ad valorem. This takes the total tax incidence to 18.45% on the imported gold. This means taxation of more than Rs. 9 lac per kg. The reasons for the hike in BCD, as publicly available, seem to indicate concerns in relation to the Current Account Deficit (‘CAD’) and the impact that the import of gold has on the CAD.

It has been historically and statistically proven that higher tax rates on Gold create an exponential increase in grey market transactions. Point to note here is that the grey market transactions are in the hands of the criminal elements which are harmful to the society at large. This may have long term effect on the society. The current increase in BCD on gold is therefore immediately required to be withdrawn to prevent an increase in smuggling and grey market transactions in gold.

With the hike in Import Duty to 12.5%, and adding 2.5% AIDC & 3% GST, makes Gold dearer by 5.5% for the end customer.  This has seriously impacted NRI business and will also impact the foreign tourist sales. This business is being shifted to neighboring countries like Dubai, Singapore etc.,

In 2011 when the duty was at 1% the exports were at all-time high, now because of such increase of duty, the entire export industry has collapsed and has become unviable. On the contrary India has a potential to be “Jeweller of the world” which can create millions of jobs and foreign exchange for our country.

Recommendation: The current increase in BCD on gold from 7.5% to 12.5% should be withdrawn and a rationalized tax structure should be developed to reduce smuggling and help migrate the unorganized sector into the organized sector.

An integrated and cohesive policy in relation to gold should be formulated to ensure that gold holdings in households are translated into a productive asset class which sustains the savings of all households and contributes positively to the national economy by way of effective gold monetization schemes and other related economic policies in light of the needs of the nation and inclinations of the rural household and LIG investors.

2. GOLD MONETISATION SCHEME

The Gold Monetisation Scheme (GMS) was introduced by the Honourable Prime Minster in 2015 to turn gold holdings into an earning asset by allowing residents to deposit physical gold- bars , coins or jewellery – into a Gold Savings Account. – the idea being to mobilise domestic gold to be channelized for productive use in the system. However, the total deposits accumulated by the banks under the GMS are 11.1 tonnes, which is a meagre number as compared to the estimated holdings of 23,000-24000 tonnes. Also, making the GMS more effective is important to address the widening current account deficit (CAD) issue. In such a scenario, it becomes imperative to understand the reason for the non-participation in the GMS. GJC, being a responsible trade body would like to emphasize upon the point that Government must clearly give exemptions to households for minimum 500 grams of gold deposited, being of ancestral nature, from questioning by any tax department. The same will make GMS more effective and benefit the government and participants at large.

There are many other suggestions to make GMS successful at the ground level like

1. Allow flexibility of GMS tenure for Banks
2. Allow banks to give Gold Loans from the Long Term deposits mobilized under GMS by them since Interest given to customers under Short Term Loan is very less.
3. Reduce physical movement of gold before issuing Deposit receipts.

Recommendation: –

1. Ministry of Finance may review and revamp the GMS scheme, with time bound targets that may be set through a comprehensive gold policy.
2. Encourage more branches of banks to accept gold deposits under the GMS and also to extend the GML (of gold received under the GMS).
3. Banks to engage with the state endowment departments to encourage greater participation of the religious institutions in the GMS. We suggest the formulation of a standardized process guidelines along with an automatic approval route for endowment departments or representatives of religious institutions to start depositing gold under GMS
4. Permit deposits as low as 1 gram, and multiples thereof

3. REDUCTION IN RATE OF GST ON GEMS & JEWELLERY TO 1.25%: –

Under the previous regime, jewellery was subject to excise duty of 1% (without Input credit) or 12.5% (with input credit). However, jewellery was subject to excise duty only if the total turnover crossed the threshold limit of INR 10 crores. Accordingly, a very small segment of the industry (approximately 15% to 20%) was subject to excise duty on. Further, the jewellery was subject to 1% Value Added Tax (VAT) in almost all states (except Meghalaya, Kerala and Tripura). Hence, we can say that the effective tax on indigenously manufactured gems and jewellery articles for majority of the players was 1% or at the most 2%.

After a lot of deliberation, Gems & Jewellery industry was accorded a special GST rate of 3%. We are really thankful to the government for giving us a special rate. However, considering post pandemic and other factors we put forward our submissions for your consideration to fix a cumulative GST rate of 1.25%, based on Revenue Equivalence Principle on gold, precious metals, gems and articles of jewellery made of such goods.

Our point wise submissions in this regard are as under:

• The Gems & Jewellery (G & J) sector deals in precious metals which are high value items and the prices of which are volatile on account of fluctuations in international demand and supply. Further, these goods being highly priced items, even a 1% tax is a significant amount of the total purchase price for the customer.
• Considering the price sensitive nature of these goods, it is subject to a lower rate of tax universally. With every increase in the rate of tax it precipitates low compliance, lower revenue collection for government and increase in grey market movements.
• Higher rate of GST on gems and jewellery articles could result in fostering of grey market for this already vulnerable category of goods.
• It has been a known fact that higher rate of taxation breeds evasion and results in parallel economy within the country and India has not been a stranger to such ills. The classic example witnessed by the industry is in case of Kerala where a levy of 5% VAT led to low demand for the business and compliance & collection issues for the Government. Thus, the Kerala Government was required to introduce a composition scheme for jewellery industry in 2015 prescribing lower tax rates.

Recommendation: – We urge the government to reduce the rate of GST to 1.25%.

4. INCREASE IN PAN CARD LIMIT

India has always been a country which is known for its traditional and hand-made jewellery. In India gold is intertwined with the society and its social practices. In India gold has a traditional value and is also mainly looked upon as an Investment Avenue/vehicle by the society at large. People in interiors, where Agricultural economy dominates, have rituals and traditions related to pure gold and Gold Jewellery that facilitates investments and acts as insurance in times of distress Every household during the weddings gifts the gold jewellery to their children as a blessing. A mangalsutra, four pieces of bangles, a small nose pin along with rings for bride and groom weighs more than 100 gms which itself costs around 4 to 5 lakh rupees.

Recommendation: – In Rural India, many households do not hold PAN cards. Hence, they face difficulty in arranging minimum required jewellery. We recommend to raise PAN card limit from 2 lakhs to 5 lakh rupees.

5. CASH PURCHASE LIMIT – CHANGE IN SECTION 40A OF THE INCOME TAX ACT

Currently, the monetary limit on revenue expenditure or purchase limit in cash is Rs. 10,000 per day. A majority of the people in Rural India prefer Gold as an Investment and have their savings in the form of Gold. In case of Medical / financial emergencies they approach the jeweller to liquidate their savings or investment. But due to provisions contained in Section 40A of the Income tax Act, a jeweller is unable to make payment above Rs. 10000/- in cash. In normal situations, most of jewellers have buy back policies and the customers get higher rates when they go back to sell to those jewellery from where they would have purchased. However, because of the monetary limit of Rs 10,000/- they are compelled to go to small and unorganized jewellers and sell the jewellery at a loss. The customers or rural farmers have no choice but make a distress sale and they badly need money in times of emergency.

Recommendation: – Keeping in mind the hardships faced by the common man during such crisis, we urge that the limit of Rs. 10,000/- per day be increased to Rs. 1,00,000/- per day.

6. EMI FOR 22 CT. GOLD JEWELLERY

Currently, loans on purchase of jewellery is being treated as Personal Loans, where the rate of interest is very high. Purchase of 22kt gold jewellery on EMI on credit card was allowed couple of years back but is currently not allowed. In many parts of India, a father is supposed to give at least 10 guineas which is equivalent to 80 grams as a practice or as a dowry to his daughter. Presently, 80 grams of gold would cost around Rs. 4.5 lakh and in today’s post-pandemic situation, where people have lost their jobs it becomes really difficult for them buy jewellery. EMI should be available for purchase of jewellery and restriction should continue only for bullion and coins. This will help the industry to move towards organized and compliant business practices.  Even, the Finance Minister in the 2018 Budget has announced Gold as an Asset Class.

Recommendation: – We urge that the facility of EMI should be extended to the Gems & Jewellery industry which in turn shall lead to substantial growth of the business of the industry and also promote digital payments in the industry.

7. RELIEF FROM CAPITAL GAIN TAX

In case of remaking of new jewellery from old jewellery or old gold, GST is applicable @18% on labour charges. Due to high rate of GST, the customers are reluctant to go for this option. The other option left with customer is to sell the old jewellery and buy new jewellery. However, as there is Capital Gains Tax involved, customers are hesitant for this option also.

Recommendation: – We urge the government that in case jewellery sold is reinvested in new jewellery, the exemption from Capital Gain as per Section 54F of the Income Tax Act 1961 should be the extended to GJI. This will help the industry to move towards organized and compliant business practices.

Warm Regards,

Mr. Manoj Jha,

MD, Kamakhya Jewels; Ex COA – GJC; Ex Director, Mumbai – IBJA; Task Force Member – CII