Taxation Woes

A few years ago, the International Monetary Fund (IMF) conducted a global study to answer key questions about the usefulness of the tax and to crystallize best practices....
Taxation Woes

The Indian gems, jewellery and diamond industry is going through taxing times with the proposals of Finance Bill 2005-06. The new taxes slapped on to this industry not only bite on the size of profits but have also increased the burden of procedures and paperwork making it all cumbersome and difficult to follow. Further, many of the clauses laid down in the finance bill are vague and incomplete leaving the industry unclear on procedures to recover their money. Further the industry concentrated in Maharashtra and Gujarat would be on a competitive edge with VAT being implemented in Maharashtra from April 1, 2005 and not in Gujarat. The co-convener of the gold jewellery committee and the convener of the Diamond Panel of the Gem & Jewellery Export Promotion Council spoke to Diamond World/Journal of Gem & Jewellery Industry who voiced their woes at this uncertain juncture.

"There are over 14 agencies we have to answer to," lamented Convener Diamond Panel of the Gem & Jewellery Export Promotion Council, Nilesh N. Shah. Beginning at the Central government level Nilesh Shah listed at least 17 kinds of taxes they have to pay and the difference agencies they are forced to deal with when filing their returns. To name a few -

  • Income Tax
  • Fringe Benefit Tax
  • Transfer Pricing
  • Customs Duty
  • Central Service Tax
  • Central Excise (2%)
  • Central Sales Tax
  • Professional Tax
  • Director-General of Foreign Trade
  • TDS
  • Factory Act - Electricity, Welfare Fund, Provident Fund, Insurance Scheme for labourers
  • Value Added Tax
  • Octroi
  • Service Tax
  • Excise Duty.

None of the above is combined at any level, thus adding to the woes of the industry. "All this on an industry that is not averse to paying tax!" It is the procedure which is very cumbersome and tedious. At every point there are hassles and corruption, says Nilesh Shah.

The industry is not against taxes being imposed. It is the procedure which should go. Alternately, Nilesh suggests a combined agency so that "we don't have to deal with so many agencies".

The new Finance Bill has introduced three major taxes that directly hit this industry. Talking about VAT or Value Added Tax most of them in the industry welcome it as in the long run it is beneficial to the industry.

"VAT is going to remain. As far as our trade is concerned VAT is good. I am not against VAT. After a few years people will start appreciating VAT. More than 150 countries around the world have VAT. Uniform system always helps. Particularly jewellery industry there is nothing to worry about. VAT is the order of the day," says Kanubhai Shah, Vice-Chairman of the GJEPC.

A few years ago, the International Monetary Fund (IMF) conducted a global study to answer key questions about the usefulness of the tax and to crystallize best practices. The findings were encouraging indicating that the spread of VAT appears to have been broadly desirable. But these findings also underscored that the success of VAT cannot be taken for granted; it requires good implementation.

It said: Refunds are VAT's Achilles heel - there is a troublesome tension between the importance of assuring prompt refunds - without which VAT loses many of its economic merits and the government's desire to guard its revenue against fraud and the temptation they face to strengthen revenues by simply delaying payments. The IMF has concluded in its study that despite VAT's impressive achievements, its potential has yet to be fully exploited or perhaps understood.

It is this "imperfect implementation" of VAT by the Central Government that has drawn flak. Though the producers have been briefed as to how to pay VAT, there are no procedures laid down for refund.

The industry jointly believes that VAT on local production is beneficial. But for products meant only for exports should not be face VAT or refund, says Nilesh Shah. "Earlier, the diamond purchased locally for exports there was a form 13A given. If we export under the same form there would be no tax paid by the purchaser. Now, any local billing which is done attracts a 1% VAT and once it is exported the seller has to go for refund under VAT.

"Also connected to VAT is Octroi. Earlier the contention was that at the last stage when the goods are to be sold locally that is when the goods are billed for local sale then a 2% Octroi is added to the invoice because the goods have not been exported and they have to be sold locally. As such since a 13A form was issued on goods for exports there was no billing done and there was no need to pay Octroi. But today because of the new system at the first point the billing is done, a 2% Octroi has to be collected at the first point itself and when the goods are exported one has to apply for refund. The procedure for refund is very cumbersome. The system of refund for Octroi in itself is also very tedious," explains Kunal Doshi, co-Convener, Gold Jewellery Panel of the GJEPC.

If I am doing 100% export every time I am buying from the market I have to pay the tax and when I export the product I have to collect refund. The government has laid down that within a certain period I have to pay the tax. But it has not specified as to within what period the government will refund the tax paid. And even they say that they will refund after say three months of filing the return. The total period of the payment at times becomes six months. For six months, every month if I have to pay 1%, at the end of the period it becomes 6%. My nett profit is not even 2% on an average of the industry. If I have to keep that money with the government, my money is lying there for nothing. Indirectly the government is exporting taxes. Thus for products which are 100% exports there should be some procedure like the 13A but not VAT, says Nilesh Shah.

The second problem faced by the industry is sending the cut and polished diamonds to SEEPZ. Everything that goes into and out of SEEPZ is 100% exports. "Then why I am being charged 1% when I am sending it into SEEPZ and they in turn have to apply for refund of the same once the goods are exported?"

"Now because of VAT we come under the perview of Octroi too. Earlier we were not paying sales tax on the goods purchased because they were for exports and we were exempted from Octroi. Now at every point VAT is being paid we are being forced to pay Octroi too. For VAT in the case of exports it is like current account. But for Octroi one has to show the export for the specific bill which is being bought," says Nilesh Shah.

This industry does not fall under Service Tax. But the central excise commission has a different interpretation. But the market notables predict that if this industry falls under the purview of Service Tax then "this industry will surely shift its manufacturing base".

"The industry will shift to China, Thailand, Vietnam… Sri Lanka, Dubai. Already many manufacturers have set up factories in China. Sure this industry will also shift base.

"If Service Tax is applied that means the government will be charging 10.2% on our labour charges. Last year on labour we have given 40% value addition. From this 40% say 5% is from GP, another 5% or 7% is from manufacturers having their own factories, but the majority of the people are getting their work done on a job-work or outsourcing. At least 95% of the 35% is dependant on outsourcing which amounts to around 32%. On this we have to pay 10.2% that comes to 3%. On the whole if we agree on 2.75% and the industry's nett profit is not 2.75% on an average. So the whole profit goes to the government kitty and no businessman is going to do business for nothing.

"Thus if the government is going to bring us under Service Tax for sure this industry will shift," emphasizes Nilesh Shah.

Excise has been applied on branded jewellery. "Brand as defined by the SC is where you can tie up the product to the manufacturer. Brands are known by the jewellery and not by the manufacturer and thus attract excise. Basically this is because these brands are alluring and attract high profit margins. The government thus says, on this 2% excise is to be applied.

"All industries survive on the creations of brands and it is the brands which sell in the long run. And not the jewellery in itself. What we are doing to increase our presence in the international market we are creating more and more brands which can be easily defined and understood worldwide. Now by implementing 2% tax on branded jewellery we are discouraging people from going towards branding.

"On Rs. 25,000 worth of jewellery 2% excise is Rs. 500. It is not collected from the consumer, when the distributor collects the product from his warehouse or from his factory at that stage whether it is sold to a wholesaler, a semi-wholesaler or a retailer it is charged. It adds to the cost. We are recovering it from them and paying to the government," explains Kunal Doshi.

Says Kanubhai Shah: "For branded jewellery we are fighting against the 2% excise duty. Personally I feel there should be no tax. Brand is also the order of the day. If you brand an item it will be easier to export. To create a brand it takes years and years. I think the commerce ministry or the people in Delhi the earlier they listen to us the better; not only for the trade but the country at large."

Rounding off the entire burden of incidence of tax Kunal Doshi sums up: "When you buy diamonds you will pay 1% VAT and 2% Octroi. On gold that is bought to manufacture jewellery you pay 1% VAT. If you manufacture the goods in your factory there is no Service Tax, but if you manufacture the goods outside your factory through a job broker then a 10% Service Tax is applied. When exporting the Service Tax is applied at each stage. Now if this changes two-three hands then the first two hands are gone. The service tax refund may be provided at the last stage. We still do not know the procedure as to how to get the refund. Thus at every stage of processing and manufacturing Service Tax is applied. Even if it is sent for rodhium polishing it will attract Service Tax. This is where diamond is concerned. Now coming to the precious metal part either gold, silver or platinum, earlier when it was purchased from the bank a Form G was issued. This Form G was a proof that the goods were for exports, they had an export obligation. The goods being purchased were also imported goods. For the requirement of the government it was routed through some agency and not being done directly by a DTA. Because of this the G Form is gone under the new VAT system. Whatever is being purchased from the nominated agency whether it is import or direct will attract VAT. When finished jewellery is being purchased from outside Maharashtra say from Coimbatore or Jaipur 1% central sales tax has to be paid which has no provision for refund. All this adds to the cost of the product making us uncompetitive."

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