Jewelers are turning to the grey market to sell smuggled bullion or jewelry at a discount, escaping a 15.5 percent duty they have to pay in their legitimate business. Demonetisation in November 2016 and the introduction of goods and services tax (GST) in July 2017 spurred jewelers to register as small and medium enterprises (SMEs) or micro, small and medium enterprises (MSMEs), but they are now scaling or shutting down their businesses because they can’t compete with untaxed grey market gold. There is a 15.5 percent (12.5 percent of import duty and 3 percent of goods and services tax or GST) tax on legitimate gold. Thus post demonetization and GST levy, the Rs 475,000 crore jewelry industry in India had seen a sharp increase in the contribution of organized sector players. Their share shot up to 60 percent in the last few years.
Newcomers on formal businesses are gradually going back to their unorganized sector business by closing down their existing business. The process of the shift has begun even before the budget. Thousands of jewelry manufacturing units have shut down their shops in the last few months. “The prevailing duty of 15.5 percent is too attractive for grey market players. The recent import duty increase has put organized sector players at a huge disadvantage.
Over the last few years, there has been up to 100 percent jump in jewelers issuing bills, paying taxes, etc, thus shifting to organized sector. But, post this duty increase, there will be more players in the grey market and activities like shutting down of shops in the organized sector would intensify, (if) not immediately but gradually,” said Somasundaram PR, Managing Director (India), World Gold Council (WGC). WGC estimates India’s gold smuggling at 100 tonnes for the last few years which, according to trade sources, has increased significantly since the import duty was increased in the Union Budget 2019 in contravention with the broader market expectations of a cut. “Shifting of the unorganized sector to unorganized is easy but not the reverse migration due to a huge amount of risk involved in it.
There could be a gradual shifting of organized players to the unorganized sector,” said Somasundaram. Jewelers estimate a total annual tax collection of Rs 35,000 crore through gold import which remained stagnant for the last few years. The increase in import duty has helped the growth of the parallel gold economy through bullion import for duty evasion. In Mumbai market, unofficially imported gold is sold at 1.5 to 2 percent cheaper to official gold. “Jewellers shifting from organized to unorganized sector players has already started. Thousands of manufacturing units have been shut down over the last few months. Some of them have closed their shops forever while others in part. The situation across jewelry industry is very paradoxical,” said N Anantha Padmanaban, managing director of Chennai based NAC Jewellers and chairman of All India Gems & Jewellery Trade Council (GJC). To appraise the ongoing situation in the jewelry sector, the GJC delegation will soon meet the Ministry of Finance to devise a solution to the ongoing problem.