India GST: A boon for UAE jewellers
Buying gold jewellery in India is now more expensive than in the UAE.
The UAE gold jewellers are gearing up not only for the festive season but also to handle excess demand from India after the implementation of the Goods and Services Tax (GST) of three per cent from July 1.
Buying gold jewellery in India is now more expensive than in the UAE - even after the adoption of five per cent VAT in January 2018. Customers need to pay a whopping 14 per cent tax on gold purchases in India.
Shamlal Ahamed M.P., managing director - international operations, Malabar Gold & Diamonds, said Indian expatriates in the UAE enjoy 13 to 14 per cent difference in gold prices between here and in India.
"GST has been set at three per cent. In addition, there is five per cent GST on making charges. Earlier, it was one per cent excise and 1.2 per cent VAT. When you add 10 per cent customs duty, there will be a difference of around 13 to 14 per cent between gold prices in India and the UAE," he said.
Ahamed explained that on July 1, the rate in Kerala for one sovereign was Rs22,536 whereas in Dubai, it was only Rs19,880 - a difference of Rs2,656. When the cost is worked out, there is a 13 to 14 per cent price advantage at the retail level for Indian shoppers in the UAE. For a consumer, it is a sizeable difference, especially when gold prices go up.
According to the World Gold Council, India's gold market is highly fragmented. The jewellery retailing landscape is dominated by small businesses - regional and national chains only account for around 30 per cent of the market. The picture in jewellery manufacturing is more extreme, with 95 per cent of the industry consisting of small-scale operations. But this is changing. In recent years, large retailers and manufacturers have been gaining market share.
It is likely that GST will accelerate the pace of consolidation. Firms that currently outsource manufacturing services to artisans and incur the 18 per cent GST rate may look to develop in-house capabilities. Small jewellery shops which may have illegally benefited by not paying tax will lose that advantage, and large retailers can compete on a level playing field.
The precious metal is witnessing a shift in both the countries - the UAE and India - as tax reforms are being introduced, putting the players under a lot of scrutiny.
In its report on 'Impact of GST', the World Gold Council says GST may be disruptive in the short term as the industry adjusts to the new tax regime. Manufacturers and retailers' working capital could be tied up because of inter-state gold stock transfers. Small-scale artisans and retailers with varying degrees of tax compliance may struggle to adapt. Consumer demand faces a headwind from the higher rate of tax. Consumers and jewellers may try to conduct recycling transactions under the counter, away from the prying eyes of the taxman.
The report states that GST should eliminate double taxation and improve supply chain efficiency. GST can make the gold industry more transparent which, coupled with recent hallmarking legislation, should ensure gold buyers have confidence in the gold products they buy, rather than continuing to suffer from the gross level of under-carating they have previously endured.
India's gold demand is expected to be between 650 to 750 tonnes in 2017, rising to 850 to 950 tonnes by 2020.
India's entire economy is on a rapid journey to becoming more organised and more transparent, boosting economic growth. This is vitally important for India's gold market: our econometric analysis reveals that Income growth is the single biggest driver of gold demand in India. GST represents a radical step forward for India's economy. While it could present short-term challenges to the gold industry, we believe it will boost the economy and make the gold industry more transparent to the benefit of gold buyers. This should support India's gold demand, which we expect to be between 650-750 tonnes in 2017, rising to 850-950 tonnes by 2020.Karim Merchant, Group CEO and MD, Pure Gold Group, said: "India's new GST aims to do away with the array of confusing taxes in the interest of simplicity and ease of doing business. As gold is a planned, prudent and investment-motivated purchase in Indian culture, customers will prefer to shop in tax free havens such as the UAE. Diwali and Akshaya Tritiya are two important occasions for jewellery purchases and we have internally budgeted for high double-digit growth, given our strong market position by offering variety of collection at the most competitive prices, including zero making charges while offering our customers world class shopping experiences."
Aranca, a global research, analytics and advisory firm, says gold purchases by Indian retail customers are not going to decline, however they are expected to be higher in the UAE than in India.
Sonal Bhatia, consultant, business research and advisory, Aranca, said the impact of keeping gold GST at three per cent would be a disadvantage to the Indian gold market, with retail buying in India being the highest in the world and the UAE in proximity to Indian flyers.Though the decision was made to make the Indian industries more organised and make India a favourable market for investors, it needs some settling time to let this impact fall in line with the government plans.
Bhatia said the next six months are going to be more turbulent for Indian jewellers as the industry will take some time to adapt to the three per cent GST while UAE gold is available at five per cent VAT until the next reform due in 2018. At least for these six months, the Indian gold market will be in a state of confusion regarding purchase of new gold ornaments versus exchange of old gold ornaments and subsequent making charges and taxations. On exchange of old gold ornaments, a consumer is most likely to pay three per cent GST two times - one while selling to the jeweller and second while getting the new gold in exchange for the previous.
"Gold purchases are expected to be negatively impacted, especially during October 2017 [Dhanteras in India] as we can expect various Indians to buy gold from Dubai to save on taxes," Bhatia said.
"The gold price has already gone up in India following the implementation of GST. NRIs and tourists will now take more gold from the UAE. We normally see a spurt during this time of the year. This is primarily on account of the holiday season," concluded Ahamed.