GST of 3% on gold unlikely to dishearten Indian demand for the yellow metal

Key Highlights

• GST rate of 3% unlikely to impact demand for gold jewellery even though prices are expected to increase.
• Prices of silver and diamond jewellery will also increase after GST.
• GST would help streamline business of unorganised players and strengthen the position of organised players.  

Demand for gold jewellery in India is unlikely to be impacted even with a Goods and Service Tax (GST) rate of 3%, as announced by the government on Saturday.

The yellow metal will still be a likely investment for both urban and rural dwellers and a higher tax will not likely cause ‘any major disruption in demand,’ analysts of ICRA said in a report on Monday.

“Gold jewellery demand is expected to be favourable over the near-term with uptick in both rural and urban demand,” K Srikumar, Vice President and Co-Head, Corporate Ratings, ICRA said.

Market expectation were hoping for a GST rate on gold between 1-6%, which were indicated earlier in the draft GST rules.

Under the current taxation system, the report pointed out that a value added tax (VAT) of nearly 1% is levied on sales in most states except Kerala where it is 5%. Along with this an excise duty of 1% is levied on the input side, excluding tax credit. Another duty of 10% on bullion imports and 15% on jewellery imports is levied.

The higher tax incidence on gold will hike the prices of the yellow metal including silver and diamonds; however this is expected to bring standardization of rates across the country.  

Also Read: Apparel, biscuits, footwear cheaper; gold costlier under GST

“Against the cumulative current tax rate of 2%, the final GST rate at 3% is higher, while the import duty will continue at prevalent rates. ICRA expects the same to be passed on to end customers and the higher tax is not likely to cause any major disruption to the gold jewellery demand,” the report said.

“At present, the total levy on gold would be around 13% (10% customs duty + 3% GST), effectively an increase of around 1% than the industry expectations of the 12%. For healthy development of trade, GST should ideally be less than or equal to 12%,” Prathamesh Mallya, Chief Analyst- Non-Agri Commodities & Currencies, Angel Commodities Broking said.

Mallya further added that gold demand in India fell 21.2% in 2016 to 675.5 tonnes but there was an increase in demand in the first quarter of 2017 of 15% to 123.5 tonnes vis-à-vis total demand of 107.3 tonnes for the same period in 2016.

“It (GST) will really not make much of difference to Indian consumers as the sentiments for the commodity remains very high, irrespective of the circumstances,” Angel Broking’s Mallya said.

ICRA said there will be ‘growing disposable income’ both from rural and urban areas on account of good monsoon and rising income levels.

“Rural consumption will benefit from favourable monsoon guidance, likely rise in minimum support prices, rural employment guarantee scheme and waiver of farm loans in few states. Urban demand will gain traction from rising income levels, staggered pay revision for state government employees and pensioners and favourable demographic spread. The long term fundamentals of the industry remain strong driven by the cultural underpinnings in the country, evolving lifestyle, and growing disposable income,” Srikumar added.

Another upside to GST, industry experts have said that the organised players will gain as GST streamlines the business of unorganised players.

“Specifically, the organised retailers are expected to benefit at the cost of unorganised players as the overall supply chain is likely to be streamlined with the scheduled rollout of GST,” ICRA said.

Further the jewellery retailers can now claim input tax credit on purchases from goldsmiths and manufacturers which ICRA said would help retailers to source from compliant organized players to claim input tax credits on jewellery and other services availed.

“Prudent inventory management, focused advertisement campaigns, effective branding, investments in internal controls systems and relatively better access to funds will strengthen the position of organised retailers going forward,” ICRA added.