Gold is very crucial to the Indian culture and the value system of the country. It is not only an investment means in India but an icon of status, wealth and key element of rituals. Even today, gold is the primary metal used for gifting, wearing and investing in India. This makes it the most popular of the entire gem and jewelry group.
Experts also believe that rising incomes of the middle-class economy leads to an increase in disposable income. Such income allows the middle-class population to invest in gold. This is the key factor that has been a growth driver for the gold industry in the last few years.
The gold industry primarily includes the gold dore bars and gold jewelry.
The difference between the above is that while gold dore bars are raw gold which do not require any job-working or processing, gold jewelry is intricately processed gold wherein raw gold undergoes intense processing and manufacturing. The gold dore bars are usually a means of investment for public or are purchased by gold jewelry manufacturers for further processing.
GST Impact on Gold
In the erstwhile era, gold attracted service tax and vat @ 1% each (vat rates differed in different states across the country). Further, customs duty was also levied on import of gold in the country. However, under the GST regime, the rates of GST vary on whether the supply of gold and gold jewelry is covered under composition scheme. Under the composition scheme, a jeweler is charged GST @ 3% on the value of gold and making charges. However, in case a dealer does not opt for composition scheme, the GST is applicable @ 3% on value of gold and 5% on making charges. Customs duty persists on import of gold. Therefore, the tax rates on the value of gold have increased when compared to the erstwhile regime. Moreover, the making charges which manufacturers levy to manufacture jewelry were not subject to tax earlier; however, the same has been brought within the ambit of GST.
Further, job-working is a common feature of gold industry. The job-workers who supply job-working services, charge GST on their services. Such services can be termed as making charges and a GST is attracted @ 5% on such making charges.
However, it should be noted that though tax rates are higher under the GST regime, input tax credit is available in most cases.
Notably, the exporters of gold have been granted an exemption by the GST Council in its 31st meeting. The GST Council also permitted such exporters to avail input tax credit of GST paid up to 2% on making charges.
Challenges for the sector
Gems and Jewelry sector has always been an unorganized sector. A large quantum of gold is smuggled inside the country owing to the high import costs. This leads to untracked and unaccounted gold and loss of tax revenue for the government. Moreover, high GST rates and import duties further encourage the illegal trading of gold in the country.
Since gold is a commodity, the value of which is fluctuating, valuation for the purpose of taxability is also a challenge.
Another issue that has come to the fore is the GST applicability on exchanging old gold for new gold. It is quite a common practice in India to exchange old gold jewelry with new jewelry. However, the industry was in a dilemma whether to charge GST on sale of both old and new jewelry. The Karnataka AAR in such matter held that in case the old jewelry is sold as such (i.e., without melting it, in as-is condition), then the GST would be payable only on the marginal amount. Marginal amount in this case would be the difference between the sale price of new jewelry and old jewelry. Similar ruling was also issued by Maharashtra AAR in another case.
Practically, all the large gold dealers first melt the old gold and then use it to manufacture new jewelry. In very few cases, the dealers buy old jewelry, polish it and sell it again. The AARs will hold good in the latter case.
Conclusion
The gold and diamond trade contributes about 7.5% to India’s GDP1. The growth potential of the sector is immense. The government also has been supporting the sector in numerous ways by change of policy etc. However, the biggest challenge that the government is currently facing is to include the sector into the formal economy and make it an organized sector. It could be a win-win situation for both, the trade and the government as it shall allow the trade to fearlessly conduct its business in legal manner and improve tax collections for the government. However, a hurdle that is coming in the way is the high tax rates. The government needs to provide more stimulus to the sector in order to transition it to formal economy.
You can also check out our blog related to the tourism sector.
Author
Komal Vithalani
Content Writer
Komal Vithalani, a Chartered Accountant and Commerce graduate, is a dedicated professional committed to delivering value with years of expertise in navigating the complexities of indirect tax laws. Her practical excellence includes managing perplexed litigations, dispensing tactical tax advice, conducting thorough compliance checks, supervising audits, and crafting articulate and insightful content. At Cygnet, Komal seamlessly blends her profound understanding of tax regulations with cutting-edge tax technology. Leveraging her competence, she adeptly transforms complex tax tech jargon into concise, impactful, and engaging content. This not only aids readers in comprehending tax-related topics with enlightening clarity but also ensures the delivery of narratives that resonate broadly.