Industry-Government Standoff Ends, Meanwhile Listed Ones Face The Heat Of ‘Bandh’

Gem and jewellery Industry was in the limelight from last six weeks but for wrong reasons. Jewellers and bullion traders lost business worth billions during the peak festive season and wedding time too. Jewellers all over India went on to observe indefinite strike demanding a rollback of one per cent excise duty on ornaments (non-silver). Over 300 associations comprising over 3 lakh manufacturers, retailers, wholesalers, artisans among others, participated in the stir across the country.

Gems and jewellery industry was already facing challenges and many jewelers complain that their business has reduced by 25-30 per cent after the government’s decision in January to make PAN cards mandatory for any transaction of Rs 2 lakh and above. Instead of increasing the slab to Rs 10 lakh from Rs 2 lakh, the government has created more difficulties by re-introducing one per cent excise duty after a gap of four years.

Government’s view

Gold has always been a black hole in the economy with least amount of regulations. Government would like to regulate and monitor the gold trade by imposing excise duty as it creates a trail of transactions. Last year government approved regulator for realty sector while, the gold trade has no such regulator. After trying to put curbs on cash transactions in the gold trade, the government now wants to be able to monitor the trade on a regular basis.

The government agencies try to kill two birds with one stone through one per cent excise duty that has helped in keeping current account deficit (CAD) under control and other bird to control flow of black money in the markets with effective monitoring. Also this will be a step towards the broader GST regime implementation.

Why excise duty is a bone of contention?

Unlike sales tax, excise is imposed on the manufacture of the goods. It helps to trace the link between the gold bought, manufactured and then sold. The government has imposed an excise duty of one per cent without input tax credit or 12 per cent with input tax credit on articles of jewellery (excluding silver jewellery, other than studded with diamonds and some other precious stones) with a higher exemption and eligibility limits of Rs 6 crore and Rs 12 crore respectively.

Why jewelers Oppose

Excise department is known for its strict monitoring on movement of goods.The excise duty would mean more paperwork, pressure for compliance and “unnecessary harassment”. Then, there are other “irritants” such as tax collection at source on sales of Rs 2 lakh and above. Many traders are ready to pay one per cent extra custom duty, but not the entry of the excise department.

No doubt, imposition of new of tax invariably adds to compliance burden and documentation formalities. The documentations/records maintained by assesse for the purpose of VAT law/internal recording purpose would be considered sufficient for excise also. Still there could be certain areas where traders may face compliance and documentation burden. It is expected that the High Level Committee constituted which would certainly look into the matter and provide for more simplified process and procedure for smooth functioning.

Jewellers Call Off Six Weeks Strike

After six weeks of closure, jewellers reopened their shops after government assured it will simplify implementation of excise duty. As per market sources, it looks temporarily halted the strike for a moment and if the demands were not met, then they will resume the strike. To address jewellers' issues, the government has constituted a panel under former chief economic advisor Ashok Lahiri. The sub-committee will look into issues related to the compliance procedure for the excise duty, including records to be maintained, forms to be filled, operating procedures and other relevant aspects. The sub-committee will submit its report within 60 days of its constitution. Till the recommendations of the sub-committee are finalized, the following shall be adhered to:

a) All payments of Central Excise duty will be based on first sale invoice value;

b) The Central Excise authorities will not challenge the valuation given in the invoice provided the caratage/purity and weight of the gold/silver with precious stones; and carats of diamond/precious stones are mentioned on the invoice;

c) The Central Excise Officers will not visit the manufacturing units/ shops/ place of business/residence of the jewelers;

d) No arrest or criminal prosecution of any jeweler will be done;

e) No search or seizure of stocks by any central excise official will be effected;

f) Exporters will be allowed to export on self-declaration and submission of LUT to customs without the need to get LUT ratified by central excise. Prevailing system will continue.

More than half of jewellers reopened their shops on Monday after keeping them closed for nearly six weeks in protest over the reintroduction of excise duty on gold jewellery.

Additional Tax May Not Deter Gold-Loving Indians From Buying Jewellery

We believe one percent tax will not affect the demand of jewellery in India due to people's ability to buy gold jewellery and desire to buy gold jewellery is still very high in India. Despite introduction of variety of measures to reduce the CAD (higher import duties, 80:20 quota for imports, restrictions on gold related lending & coin sales) India still reported second highest demand after China for gold in 2015 at 24.77 per cent of world demand.


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The chart shows that demand for gold in 2015 grew by 5 per cent YoY at 848.9 tonnes, its highest level since 2010 and the third highest year in last 20 years. Indian consumers have been steadfast in their desire for gold, even in the face of very challenging circumstances – most notably, extreme adverse weather conditions and a squeeze on rural incomes. Rural demand being a key driver for jewellery demand constituting about 60 per cent of total demand.

Unorganised Sector VS Organised Sector

Unorganized Sector:  More than 80 per cent of jewellery manufacturers are from micro sector i.e. largely un-organized nature of the jewellery industry, existence of small entrepreneurs, karigars and babus will mean more difficulty in implementation. Therefore these manufacturers would have to scale up their businesses or cut cost to protect margins. This could lead to structural changes and will also lead to consolidation.

Organized Sector: Here is the list of companies which are listed on the exchange. We believe at initial level they may face the problem then going forward organized business will grow as against unorganized and especially thriving on business without maintaining records would face a tough time. 

Conclusion:

In the near term, organised players could take a hit as small unorganised players may not adhere to these rules. Thus, while there has been some short term impact on volumes and margins, performance over the next 12 months is unlikely to be impacted significantly by this regulatory proposition.The measure, in addition to aiding the organized retail industry over the medium to long term, would favor the organized jewellery manufacturers as well, as they possess strong information systems to comply with the requirements. Plain silver jewellery, coins and bars may attract buyers as prices of these items will not be affected in the budget. Emphasis on boosting rural economy in the recent union budget and expecting a good monsoon is also likely to spur rural demand which could augur well for the industry.