India’s new tax system reshaping diamond processing industry

[Image courtesy - DNA India]

Surat, the diamond city of India is said to contribute 60% of world’s diamond supply in value and 85% in volume. On the other hand, Mumbai is one of the largest centers for trading cut and polished diamonds worldwide. This makes India one of the largest diamond processing and trading hubs in the world. The Goods and Service Tax (GST) levied by the Indian government last year had initially affected lot of businesses in India, including diamond processing industry.

GST raids traditional courier service (angadias) carrying diamonds from Mumbai to Surat

Earlier in the month the department of GST and central excise detained 85 angadias, carrying 90 bags of 1,042 high-value parcel, while conducting a joint raid in Mumbai. The parcels were suspected to have evaded huge amount of tax. On further investigation, some parcels were reported to be genuine with proper paper work and were released. While majority of them did not have any paper work and were seized by the department.

Importers have to pay 0.25% GST on the imported diamonds and are sent to the processing units in Surat, Bhavnagar, Amreli, Ahmedabad and Navsari. The final GST of 5% is levied on the sale of polished diamonds. Since the GST would have been paid once the stones were received and sold by the owner, there was no point in seizing the parcels, said Sabyasachi Ray, executive director, Gems and Jewelry Export Promotion Council (GJEPC).

Long periods of working capital blockage

GST applies to only imported diamonds and not on exports. Traders have to pay import duty while importing diamonds and claim the refund when they export the stones. However, for the claims made in July 2017, many traders are getting the refund now. This large period of working capital blockage had greatly affected the trade.

During the entire value chain of processing, a diamond had to go through 10 layers where on every channel a 3% GST was charged. However, the government recently cut down the rate to 0.25% bringing in some relief to the traders and boosting exports.

Indian diamond manufacturers setting up units in Russia

The transaction cost to procure rough diamonds is high in India as the manufacturers are unable to buy them locally. The Special Notified Zone (SNZ) at Mumbai’s Bharat Diamond Bourse allows manufacturers to view and bid on diamonds from miners like Rio Tinto, De Beers, Alrosa etc. but have to buy from Belgium, Dubai, Singapore and Russia.

The absence of a tax structure that aligns with the safe trade of diamonds has resulted into miners fearing the direct trade with the SNZ. They want the Indian government to come up with a tax structure similar to that of Belgium. In Belgium, there is no tax levied on transactions between registered diamond traders.

“But Indian tax authorities want to enter into advance pricing arrangement and fix the tax rate. Miners don’t agree to this as they fear that tax outgo may hurt them in those years when business is not good,” said Sabyasachi Ray.

For easy access of rough diamonds, Indian manufacturers are moving to Russia to set up their cutting and polishing units. KGK Diamonds along with M Suresh & Co. are already in talks to set up their units in Russia. In fact, KGK Diamonds has already announced their investment of 2.8 million Russian rubles in Vladivostok with an annual manufacturing capacity of 150,000 carats of diamonds.

Sanjay Shah, convener, diamond panel, GJEPC said, “In the absence of a proper tax structure for trading at SNZ, we fear that Indian diamond companies may shift a portion of their business to Russia. Russian president Vladimir Putin is inviting diamond trade across the globe to set up units in his country. India, being the leader in cutting and polishing of diamonds, will find it easier to procure raw material and cut down transaction cost if it starts operating in Russia.”

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