Diamond Traders Fear The Rough Edge Of GST

India’s diamond industry fears that the Goods and Services Tax on each level of the supply chain will starve firms of cash for daily operations, crippling businesses in the $20 billion export-driven sector.

“We work on thin margins and the working capital requirement is high given the cost of diamonds,” said Sabyasachi Ray, executive director, Gem and Jewellery Export Promotion Council. “The already low-margin business will gradually get wiped out.”

To create an audit trail, GST introduces two new taxes. Rough-cut stones will be taxed at 0.25 percent, which will be passed down each level to consolidators or companies that hire polishing firms. Processing services will also attract GST at 18 percent. Both the levies will get a credit and can be set off against future liabilities.

It could result in a longer working capital cycle even though the taxes will be ultimately refunded at the export level, said MS Mani, senior director, indirect tax, Deloitte India. Since input services will be taxed, there is a possibility that some intermediaries may see credits accumulate for a few months, he said.

India, the world’s largest hub for cut and polished diamonds, imports rough stones from countries like Belgium, the United Arab Emirates, Israel and Hong Kong. Exporters and jewellery makers hand them down the chain to diamond polishers. A million people in Surat and neighbouring region work in small factories that employ 15-20 workers each. There are three to four levels of cutting and polishing that require different skills and are done by multiple factories, said Ray.

Only 5 percent of the cut and polished stones are used at home. The rest are exported, contributing more than half of the $39-billion gems and jewellery shipments, according to data provided by the government-backed export promotion council.

All India Gems & Jewellery Trade Federation has demanded that the tax on polishing and jewellery manufacturing be lowered to 3 percent and the threshold turnover for falling under the GST net be increased five-fold to Rs 1 crore. Another suggestion is to collect the 18 percent tax from jewellery making companies so that unregistered factories are not hit and the audit trail remains intact.

It may be a bit late though, said G Shivadass, principal partner at law firm Lakshmikumaran & Sridharan. Deloitte’s Mani said since the threshold is at Rs 20 lakh for all businesses, it may not be possible to increase it for one sector.

That’s not the only worry for diamond traders though. The tax on polished stones has been increased three-fold to 3 percent under GST. Earlier, a value-added tax of 1 percent was levied in all states except Gujarat.

Now that 3 percent will remain stuck at the last link for three to four months till the credit is set off or refunded, said Ray. It may even take seven to eight months – from importing rough diamonds to exporting or selling polished stones or jewellery – for manufacturers and exporters to get the refund, he said.

And like several other sectors, it’s the unorganised part of the diamond trade that may prove to be a hurdle for a smooth rollout of GST.

If unorganised players fail to move to GSTN in time, there will be a shortage of polishers and jewellery makers, pushing up costs. A lot of workers may also end up losing jobs, Mehta said. Right now, the focus is to protect the smaller factories, he said.

The government had promised taxes will remain around the existing levels under GST but levies on rough stones and polishing services didn’t exist earlier. This goes against the whole idea of GST equivalence principle, said Mehta.

“When 95 percent of the entire business is exported, why is the government increasing the cost of production and taxing its own exports?”