GST headwinds for gold jewellery sector but high price may impact demand

Imposition of the Goods & Service Tax has changed the way gold was traded in India. Prima facie, it has helped large gold chains to grow, the industry is consolidating and small jewellers have opted several other ways to retain customers and business. 

However, challenges still exist for jewellery industry as demand will be impacted due to high price, under pressure jewellers finances and rising cost. Hallmarking will lead to the churning of inventory.

The immediate impact of GST was felt with rising unofficial or smuggled gold import. According to GFMS, a metal research unit of Thomson Reuters, gold survey-‘18, “unofficial imports Increased in 2017. Our estimate is that 134.5 tonnes were smuggled into the country last year, ten tonnes higher than 2016."

Overall, GST has resulted in the reduction in cash transactions. The increase in smuggled gold import is also surprising because gradually trade has been shifting to digital and card payment. Considering unofficial import with the official import of 880 tons, India is back to 1000 tons annual gold imports. However, of the 880 tons, deducting for exports, net official import for domestic market was 663.3 tons.

Last year, the government had announced several regulatory measures for jewellery trade and the ban on cash transaction beyond Rs 200 thousand. It had an initial impact with jewellers started offering lightweight jewellery studded with precious stones to make them look heavy. Later, consumers and jewellers found the way out.

According to GFMS survey, customers pay cash for the whole amount and bargain gold price to get a discount of 0.7 to 1 per cent. Traders show that customer exchanged new jewellery for an old one. Jewellers produce a bill for making charges and pay GST on job work and use the cash received from customers to buy gold from illegal market. They
melt illegal gold to show it as melting of old jewellery collected from customers.

Another impact was seen in terms of large retail chains gaining major chunk of the market as GST impact started stabilizing. Market estimates that nearly 25% of retail business has shifted to big retail chains. Ahammed MP, Chairman, Malabar Gold & Diamonds said, “The national and regional chains have been able to clock better sales thanks to effective marketing strategy, insight-driven sourcing and inventory management strategy and quality customer service.”

Large chains also have access to banking facilities like Gold metal loans at around 3.5 per cent interest and monthly gold deposits against future sale which smaller jewellers find difficult. The rising market share has also resulted in consolidation in the industry.

“market consolidation is happening in the industry in favour of organised players. In fact, the pace of market consolidation has picked up post GST,” Ahammed said. 

The rising market share has also given large chains additional bargaining powers and smaller jewellery manufacturers, including artisans, are joining or merging with big chains. 

“It could be possible, as achieving design differentiation is one of the ways to gain market leadership,” Ahammad said.  

Several smaller jewellers have started complying with the new regulatory regime. PR Somasundaram, World Gold Council MD for India said, 75 per cent of the industry is now GST compliant. GFMS has pointed out small jewellers also have a strong point in terms of direct tax for which it has sighted the budget provision.

In the 2018-19 budget, it was proposed that the definition of MSMEs be changed based on their annual turnover and reduction in income tax rate from 30% to 25%. This has come as a huge benefit for all jewellers with the annual turnover of less than Rs.2.5 billion. It gives a fair advantage in pricing for family-run stores.

Other headwinds include a proposed act to ban unregulated deposits which will not allow jewellers to run gold deposits scheme which they show as an advance sale but deposits go on for 11 months. The impact will be felt when this becomes an act and government notifies the last date by which such deposits shall be returned.

GFMS report points out that The Insolvency and Bankruptcy code, 2016 will have a direct impact on jewellers and may lead to the rationalising of store expansion by jewellers who were increasingly dependent on bank credit. Eventually, the organized chains will have to change the strategy to 'increasing the per-store sales’ from ‘the number of stores’ to maintain profitability.

Proposed mandatory hallmarking of jewellery is another factor which consumers are watching as hallmarked jewellery, when made mandatory in phases, will add to the cost but will guarantee purity.