GST and gold: what will be the impact

Over the course of the year, as the industry and consumers adjust to the new environment, we could see a revival in demand

The much-awaited and one of the biggest tax reforms in India is set to be rolled out on July 1, 2017. The issue about taxation on gold was much debated and finally a rate of 3% is fixed. While the headline rate is slightly higher than the current taxes on gold and jewellery, it is much lower than what was feared initially.

The industry in general has also welcomed the 3% rate. Now that clarity has emerged over the tax rate, we try and assess the potential impact on gold demand in India and how this tax will affect the organised and unorganised gold trade.

Currently, jewellers pay 10% customs duty on gold and pay 1% excise plus 1.2% VAT over and above that. This effectively works out to 12.43% when buying jewellery and 11.32% when buying bars since bars do not attract excise duty. With the introduction of GST at 3% for gold and 18% for making charges, the effective rate comes to 15.67% when you include 10% customs duty.

So, the effective price increase on gold jewellery comes to 3.24%. It is clear that gold is going to get slightly expensive for consumers in India.

This is also because the government wants to discourage gold buying. Gold bars will be dearer by 1.98%, after GST while jewellery will be expensive by 3.24% compared to current levels.

While there will be some initial reluctance, we believe jewellers will easily be able to pass down the incremental cost to the end consumer.

Impact on demand
As mentioned earlier, the slight increase in taxes is likely to impact demand initially, but we expect that passdown to retail consumers will not be much of an issue over a period of time.

Jewellers have already stocked gold before the GST implementation as evident from the import data and therefore, it will be difficult to assess the impact on demand after the GST comes into force. India’s gold imports in the first five months of 2017 have surged 144% year-on-year to 424.1 tonnes as per GFMS data.

This means that imports will be much lower during the peak season during Q4, as gold buying has been front-loaded in the first half of this year.

Over the course of the year, as the industry and consumers adjust to the new environment and as further clarity emerges, we could see a revival in demand.

We expect full year 2017 demand in India to be slightly higher than 2016, but still would be significantly lower compared to five-year averages.

Impact on jewellery trade
GST is clearly going to benefit the organised trade more given that organised and branded retailers will find it easier to comply and implement the new rules.

On the retail front, almost 30% of the jewellery sector is organised and these players could find it difficult to comply as effectively with the new rules.

Secondly, for branded and organised jewellers who have integrated manufacturing, the 18% GST on making charges can be averted. Third, a structural shift towards organised trade is already under process and demonetisation and clampdown on cash transactions has hastened up that process.

The government in the last budget imposed a limit of Rs 2 lakh on all cash transactions, and this will help organised retailers more as the unorganised players dealt more with cash.

On the whole, there will be teething troubles initially for the industry to comply with the new set of rules but large organised and branded retailers will be at an advantage.

Summing it up
We believe that GST is a step in the right direction and over a period, both the industry and consumers will stand to benefit with increased transparency.

While there are still concerns in certain areas due to lack of clear detail, these initial hiccups are unlikely to impact the industry to a very large extent. Gold has been a favoured asset for Indians over several decades and demand from GST is unlikely to be negatively impacted.

(The writer is AVP — Commodity Research at Motilal Oswal Commodity Brokers)