Is the excise tax on jewelers reasonable?

Is the excise tax on jewelers reasonable?

Introduction:

Jewelers everywhere have resorted to protests and strikes about the reintroduction of tax on jewelers as stated in Union Budget 2016. The excise duty of 1 per cent on gold and diamond jewelry was announced by finance minister Arun Jaitley and ever since then, Indian Bullion and Jewellers Association (IBJA) has not breathed the air of peace. While there is no seeming to altercate this decision by finance ministry, it has the jewelers really worried.

Previously, there have been attempts to curb gold demands in India. In the year 2013, 10 per cent import duty was imposed on gold yet the demand never seems to go down. We, Indians have always taken it literally that gold is all about bringing home good fate and an asset worth exchanging later when in need. Apart from adornment, gold shares never ceases to attract business moguls.

In the year 2012, when similar excise duty was imposed the decision was soon put to rest because of the large scale strikes by jewelers everywhere in India. It will be worth seeing if this time the government would be able to sustain the tax or would soon writhe and thwart under pressure from IBJA.

Reasonable:

1. Large scale import: Gold import doesn’t seem to be going down even when the price is rising high and touching stars. Our annual imports count up to 1,000 tonnes of gold. This statistics is also the one responsible for a quarter of trade deficit in India. With a part of profit going into tax, there is some hope of lowering demands and hence lessening of large scale import of gold. This move could do well if assessed thoroughly.

2. Idle lying gold: If statistics are to be believed a total of 20,000 tonnes or more of gold is lying idle in Indian households and temples. To pool these resources and bring them to good use, last year PM Modi announced the Gold Monetization scheme which seemed to draw a good number of people but the majority was still lagging behind, waiting for prices to soar high so that they could bring their gold to a more profitable deal. Imposing of tax on gold and diamond jewelry could take the prices high and hence attracts sellers to pool their idle lying gold.

3. Thinking global: We are the largest consumer of gold in the world. We import the highest quantity of gold annually and yet our demand never ceases to go down. The prices still goes on to soar higher than necessary. With the imposing of this tax, our demands might considerably fall down and hence lower imports which will in turn put pressure on global prices to fall down. Just the last few months have seen what we could do if we have half the heart to do it. When gold prices rose and people restricted the purchase of gold, importers were forced to offer a discount of up to $53 per ounce in order to clear their inventory. With a little more efforts from our side, we could put some real pressure and further lower the price of gold globally.

4. Appetite control: The big and still growing appetite that we have for gold doesn’t seem to be decreasing ever. We regard gold as auspicious and continue to deposit them in our households, generations after generations. We are poor as an economy, let’s accept it. The majority of our people go without proper living conditions and yet to continue to stash gold. Daughters are laden with gold jewelries during their marriages and dowry cases never seem to stop because we have a greedy appetite for gold. Our temples and deities are adorned in gold while those begging outside do not have even proper clothes to cover their body. We need to learn big time on controlling gold appetite.

5. Corruption: Rich people, shying away from tax, store wealth in form of tax. There is no tracking how these people got hold of all that money that they safely stack in form of gold. Authorities have no way to track that and corruption grows unsaid and unseen. Gold sales lacked proper documentation until now and ill practices continued to grow unnoticed. Almost half and sometimes more than that of the savings remain unidentified and revenue generation becomes difficult.

Unreasonable:

1. Hurting traders: Levying tax on gold and diamond at a time when the nation is already facing a price hike in gold and considerably lowering the sale of gold, jewelers definitely have a lot to worry. With lessening of their sale, further taxing and hike in price would only put off more gold consumers. With a lowering appetite for gold, the all-time favorite jewelry of Indians, trade is definitely at a loss. The countrywide strikes did not come up for nothing. They certainly were agitated with the move.

2. Small retailers would lose business: While high end traders in gold and diamond would only lose a penny out of their wealth stash, it is small retailers who would face the real wrath of the tax levying decision. They would suffer huge loss in business with consumers neglecting jewelry for the longest. It is to be noted that only middle class and people with limited means opt for small retailers while buying jewelry. Well to do people usually go for big hallmarked brands. Since middle class won’t be buying gold due to further hike in price, we can guess where the small retailers would soon go.

3. Not in the interest of artists: It is estimated that about 10 million artisans in India would lose their job and livelihood with decreasing demands of gold and diamond jewelry in the country. It was a big moment of pride for India when Kate Winslet chose to wear the three glittering pieces of diamond jewelry made in India by the skilled hands of Indian craftsmen. It was quite evident that Indian craftsmanship was getting a boost and being liked worldwide but this reintroduced tax seems to kill that spirit.

4. Dialogue was necessary: Before levying a tax on gold and diamond, finance ministry should have spoken to traders and initiated dialogue with them so as to understand if they would be facing crisis after this decision and if there are other alternatives to generate revenue from stashed gold. In the 6 days strike, there happened to be a business loss of about Rs. 6000 crores which further made way for a revenue loss of about 200 crores in custom duty and about 48 crores as VAT tax in the country.

5. Difficulty in execution: The big traders say that they are not against paying the taxes, they believe that an additional variety of tax increases their accounting problems. They say that they are willing to pay an increased 1% tax but if it was in the form of VAT or some other tax that they were already paying, it would make the execution process easier. At the same time, the union argues that the new form of tax increases the problem of small artisans who make and sell but do not fall under the tax bracket. It would increase their accounting work.

Conclusion:

Levying excise tax on gold and diamond could benefit the intentions of the government to curb India’s appetite for gold but at the same time revenue generation will suffer with trade going down and lesser people purchasing gold.

However, the upside remains that Indians need to learn to let go of the old customs where giving off gold to daughters at the time of their marriage is an obligation. Poor people have been burdened with this custom when they have to spend their lifetime savings to buy gold for their daughters.