Arun Jaitley’s budget speech with its `9 pillars’ of growth may have soared the hopes of many, but his one sentence, announcing 1% excise duty on all gold jewellery as well as studded jewellery ornaments, floored the entire gems & jewellery trade. For, a trade that pinned its hopes of a reduced import duty on gold and presumptive tax for the gems & jewellery trade it was a rude shock. So much so, that the trade has been on an indefinite strike since 1 March. They want a complete roll back of the excise duty, nothing more and nothing less, period.
The imposition of excise duty and the introduction of the excise department have sent the trade into a panic mode. They say that they are reminded of the horrors caused by the inspector raj during the period of obnoxious Gold control Act that lasted from 1962-1990. The same Arun Jaitley, as union commerce minister in 2004, had announced in his trade policy that gold imports would be `freed’ of all restrictions. He went on to add that even a ‘paanwala’ could import gold. Therefore, the trade had high hopes when Jaitley was made the finance minister at the centre.
The trade that was under the cosh on account of the CAD induced restriction on gold imports in the form of 10% import duty coupled with the 80:20 scheme of bullion imports. However, while the 80:20 scheme has been scrapped, the import duty on gold continues to be at 10%. So, while the CAD situation seems to be under control on account of lower official gold imports and more pertinently the lower crude oil bill due to the crash in crude oil prices, the gold trade continues with its set of problems led by smuggling, higher hawala rates and round tripping of gold and other precious metals and diamonds.
Moreover, NRI remittances that come under invisibles in the government balance sheets have shown a decline in the last three-four years. It is very much debatable whether the remedy has been worse than the malady. Therefore, the trade pinned all its hopes on Jaitley to wave the magic wand. Instead, when the FM introduced 1% excise duty on jewellery the trade lost its collective patience. Even the raising of the excise threshold limit from Rs 6 crores to Rs 12 crores nor the setting up of a high powered committee to set up a mechanism to prevent harassment by the excise department has failed to assuage the trade and they have continued the indefinite strike and insist on a total roll back of excise duty.
Even the refiners in the dta area are riled by the rationalization of excise duty in the budget. Now, the duty differential between gold dore and imported gold bars is 1.25% instead of the earlier 2%, making it difficult for gold bars to be manufactured in India. Moreover, while excise free areas continue to hold the 2% advantage even that is on the way out as the government has decided to phase out concessions in the Uttarakhand region and no concession to new units there. Whither, Make in India!
In 2012, the then FM too had tried to impose excise duty. Then too, the trade went on an indefinite strike and the excise duty was rolled back on branded and non-branded jewellery. So, why is the FM now going down the same path? The 1% excise duty has a corollary; non-credit excise would attract a 12.5% countervailing duty against imports. In the current context, a 12.5% excise duty is imposed on jewellery imports from Asean countries. Now, India has FTA agreements with Asean counters, whereby gold jewellery imports attract a concessional rate of import duty. So, while Thailand attracted 1% duty in 2012, Malaysia and Indonesia attract a 2% duty. These FTA agreements have been in place for a long time. However, as long as the import duty was lower it did not matter.
In 2012, the import duty on gold was raised from Rs/100 per 10 gms rapidly in a few months to 4%. Therefore, import of gold jewellery from Thailand was the point of debate and much heartburn for the bullion trade, particularly after the government first increased the import duty on gold bars to 2% (up from 1%) in January 2012 and then to 4% in the budget. While the FTA with Thailand, whereby jewellery from there could be imported at a concessional rate of 1%, was in place for a long time, the increase in import duty on raw gold at 4% was expected to skew the marketplace. It was expected that imports from Thailand could go through the roof and replace the import of gold bars to some extent. Moreover, if gold jewellery were to be imported in bulk it could have impacted the Indian gold jewellery manufacturing sector in the long run. It could have rendered lakhs of artisans jobless.
Quite expectedly, gold jewellery imports for 2012 aggregated $5 billion (around 94 tonnes), an increase of over 500%. However, when one looks at the import data in detail, jewellery imports from Thailand aggregated just a mere $113 million or just over 2 tonnes. So, where was the catch? The catch was that while Thai jewellery imports to India attracted 1% duty, jewellery exports from Thailand to the UAE attracted just 0.32% duty. So, in all probability Indian jewellers got their Thai jewellery to India via Dubai to Surat (in particular).
While India’s jewellery imports from Hong Kong in 2012 were $963 million, imports from the UAE were $3.7 billion. Industry sources opine that around 95% of this jewellery from both Hong Kong and UAE would be fine gold and almost all such imports were for round-tripping of jewellery from Dubai to Surat and so on. Converting the same into quantity at the average gold price for 2012, it would be around 90-94 tonnes.
Probably, the then government chose to roll back excise duty and instead concentrated on curbing CAD. At that point in time CAD was the top priority for the government. It raised the bogie of value addition in gold jewellery and asked the customs here and authorities there to implement the same. For, there were fears about Chinese jewellery making an entry into India and flooding the markets or such jewellery to be converted into bars here and make a mockery of the 10% import duty. Subsequently, the import duty was raised to 10% and it continues to this day.
With CAD under control, the current government hopes to kill two birds with one stone. For, FTA agreements cannot be cancelled for a single product or a group of products. Probably, the government does not want a repeat of the 2012 situation when jewellery imports from Thailand were on the rise. It wants to put an end to a potential surge in such imports in future as well. The 12.5% countervailing excise duty offers an ideal solution to the problem as it effectively makes import of jewellery unviable. But, then excise duty had to be imposed on the gold trade. Therefore, the move to impose 1% excise duty in the budget was taken by the FM.
The other bird that the FM wanted to kill was to find a way to regulate and monitor the gold trade. While the process to have a regulator for the realty sector has begun, the gold trade has no such regulator; Sebi has too much in place. After trying to put curbs on cash transactions in the gold trade, the government now wants to be able to monitor the trade on a regular basis.
The trade refuses to buy the FM’s specious argument that excise duty is a prelude to GST. The trade says that they are fine with 1% extra levy, but not the entry of the excise department. The trade also does not give any credence to the assurance given by the FM that the excise department will not enter shops and seal establishments. While the government wants control, the trade wants freedom and ease of doing business. It is deadlock as of now.
With Municipal election next year in Mumbai, the stand-off has political overtones to it. The gold trade has long being considered as the vote bank of the ruling party at the centre. But, it seems that after three budgets they are disillusioned with the ruling party. While the MNS chief told the jewellers to sustain the strike, the Shiv Sena has assured the trade that they would help make their `morcha’ successful, the Congress too is talking to the trade. So, who will blink first? Will political expediency gain over the urge to control? Watch this space!