Bad news for bullion: High GST rate could take much sheen off gold demand

The 15th meeting of good and services tax (GST) Council, scheduled to take place on Saturday, is expected to finalise the rates for all items that have been left out of the GST structure so far. Items for which the GST rates have not been fixed include precious metals, textiles, beedi, footwear and agriculture implements.

Higher GST rates to hurt unorgansied sector

The unorganised sector that has been left out of the GST slabs so far is likely be to impacted. The sector comprises at least 300,000 jewellers, and artisans with direct and indirect employment run into millions.

“Households with agricultural income in rural India spent 30 per cent of their income on durables goods, of which 30 per cent was in gold jewellery. High tax and other governance measures will hurt this demand significantly,” said Sanjeev Agarwal, Chairman, FICCI Gems & Jewellery Committee.

Total demand for gold and jewellery is estimated at around 200 tonnes in rural India.

At present, there are around 2,000 jewellers registered for excise -- a fact that indicates that a majority of them continue to remain beyond the tax net. Cash transactions continue to dominate, while smuggling remains difficult to be curbed. A high GST rate will incentivise this further, thereby causing fear among experts that the whole chain would prefer to remain out of GST.

How GST will help

Organised sector will grow as they have been transparent, although they will not be spared from a high tax burden, which will in turn lead to higher prices and impact consumer demand.

Gold investments in financial instruments like sovereign gold bonds could be beneficial as they would not attract a GST levy, thereby, being avaiblable at cheaper rates.

The government may rejoice at the last National Sample Survey Office (NSSO) survey that noted household expenditure on gold and jewellery items to account for 17 per cent of the total spendings on durable goods.  

If demand for jewellery is impacted, money could flow to other financial investments and reduce generation of ‘idle assets like gold.’ 

Experts suggest offering incentives for the gold monetisation scheme would help increase deposits up to a certain limit, thereby, enabling the productive use of idle gold assets.

What is required

If NITI Aayog's proposal, which recommends a 5 per cent GST rate for gold and another 7 per cent in customs duty (10 at present), is accepted by the GST Council, it will keep the overall burden of the sector at the same level and disincentivise unofficial imports.

An 18 per cent levy from workers should be eligible for input credit, as 80-90 per cent of the jewellery-making process requires the services of skilled and unskilled workers.

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