Gold and GST

How it could be a game-changer for the Indian gold industry…

The GST Council finally announced the rate of GST on gold. At 3% GST the Council has almost maintained the status quo on gold rates. Currently, gold attracts 1% excise plus 1% VAT and 0.5% cess. Thus the total impost on gold will marginally go up from 2.5% to 3%. What will be the implications of the GST rate on gold on the economy?

Almost status quo on rates…

By setting the GST rate on gold at 3%, the government has almost maintained status quo on gold tax. If the reaction of the gold makers is any indication, then this has come as a relief to all those who were expecting an impact of 5% under GST. In fact, the GST Council has gone to lengths to create a separate categorization, not originally available, to specially accommodate gold. Even if you include the impact of 10% import duty, the overall rate will still dissuade gold smuggling into India.

Will also get input tax credit…

The second big advantage that may not be apparent from the rates is that the input tax credit (ITC) will be available to jewelers fully and seamlessly, The ITC is the credit that is available to the manufacturers and service providers for the tax that is already paid on the inputs which go into making the final product. When the impact of the ITC is also factored, the actual effective rate of GST on gold may be much lower.
A boost for organized sector…

One of the fundamental advantages of the GST is that it will bring a lot of traders and manufacturers into the organized segment. Currently, nearly 80-85% of the gold makers and the jewelry manufacturers operate in the unorganized segment. While GST will bring this segment into the organized mould, it will also ensure that this acts as an incentive for them to get in. For example, the organized segment is better regulated and hence the entire operation becomes more institutional. That makes financing and equity placements possible at a later stage. This could open up a huge opportunity for the unorganized segment. From the point of view of the organized segment, they will benefit because the artificial advantage enjoyed by the unorganized segment will no longer be available giving them a level playing field.

Possibly greater consolidation…

One of the positive outcomes of the GST could be greater consolidation of the jewelry industry. Currently the industry is a tad too fragmented and too geographically dispersed. GST may spur the trend towards consolidation with smaller jewelers and gold makers preferring to throw in their weight behind larger institutional players. That way they get reach and a bigger market. That will be a big boost for the jewelry industry overall!