GEMS & JEWELLERY INDUSTRY UNDER GST REGIME (PART-1)

[Dr. Sanjiv Agarwal]

Prologue

The Gems and Jewellery sector play a significant role in the Indian economy, contributing to over 5 % of the country’s GDP. As one of the fastest growing sectors, it is highly export- oriented and labour intensive.

Based on its potential for growth and value addition, the Government of India has declared the Gems and Jewellery sector as one of the focus area for export promotion. India is considered to be the hub of the global jewellery market because of its low costs and availability of high-skilled labour. The industry generated US$ 38.6 billion of revenue from exports in 2015-16, making it the second largest exporter after petro-chemicals. (Source: www.ibef.org)

Currently, gems and jewellery sector is exposed to various indirect taxes, viz. Excise Duty, Service Tax and VAT/Sales Tax. The current indirect tax regime in India provides for a complex tax environment due to multiplicity of taxes, elaborate compliance obligations and tax cascading. The proposed GST regime is expected to simplify the indirect tax regime as it would subsume most of the indirect tax laws and hence is to be considered as a major tax reform.

The proposed GST regime shall subsume various Central and State level taxes and the model GST law will include a Central GST, and SGST for intra-State supplies and IGST for inter-State supplies. Gems and jewellery items are likely to be covered under the ambit of GST and provisions of IGST/CGST/SGST would apply to persons who are engaged in a supply of gems and jewellery. Therefore, it’s become the need of jewellery industry to implement GST effectively.

The following key aspects of the Model GST Law as relevant to the Gems and Jewellery Industry:

Possible increase in Gems and Jewellery cost and price?

Currently, the rates of Central Excise duty on the Jewellery are as follows:

1. 1% on transaction value without Cenvat credit on inputs and capital goods. (However, credit on input services is eligible), or
2. 12.5% with Cenvat credit of inputs, input services, and capital goods.

VAT is levied at the rate of 1% or different rates (may vary from State to State) for sale in India.

Under the model GST law, lowest approved GST rate is proposed to be 5%. If gems and jewellery item will be classified under the lowest tax slab, then this will become a major concern for this sector paying excise duty @1%. As a result they may have to pay CGST/SGST @5% instead of what they are paying in existing taxation laws, i.e., 2% (1+1). This shall increase the prices of gems and jewellery. However, this will be subject to availing Cenvat Credit of tax paid on inputs.

For assessees who are paying excise duty @12.5%, if gems and jewellery is taxed @5%, then this will be a relief for them. However, classification of goods and/ or services is still pending for taxability of GST rate. Therefore, more clarifications are being looked at.

Taxable Person

For GST, ‘taxable person’ means a person who is registered or liable to be registered under Schedule-V of the Act. Accordingly, every supplier shall be liable to be registered under the Act in the State from where he makes a taxable supply of goods and/or services if his aggregate turnover in a financial year exceeds rupees 10 lakhs in the North-East States including Sikkim and hilly areas and rupees 20 lakhs for other States. Therefore, threshold limits of rupees 20/10 lakhs available for registration under GST. A person can opt for composition scheme if the aggregate turnover is more than rupees 20/10 lakhs and less than rupees 50 lakhs subject to conditions.

Further, importers, exporters and persons who make inter-state supplies shall also be considered as a taxable person and needs to be registered under GST irrespective of threshold limits.

Threshold Limits

Under Excise law, the benefit of normal SSI exemption (exemption based on the value of clearance) is presently available if the value of manufactured goods (on own or through job worker) cleared domestically has not crossed ₹ 1.5 crores. (all goods manufactured including silver jewellery).

Under GST regime, the threshold limit of ₹ 10/20 lakhs is provided for payment of GST. Since, under GST regime limit of threshold exemption will be reduced to ₹ 10/20 lakhs, it will adversely affect the manufacturers. 

Shift in Taxable base from Service/Manufacturing/Sale to Supply

In service tax law, rendering of service is a taxable event for levy of Service Tax. Similarly, in the case of central excise, manufacturing is a taxable event for levy of central excise duty and sale is a taxable event under VAT laws for levy of VAT/Sales Tax. However, in GST regime, ‘Supply’ will be considered as a taxable event under GST.

Supply shall include:

• all forms of supply of goods and/or services made or agreed to be made for a consideration by a person in the course or furtherance of business,
• Importation of service for a consideration, and
• Services have been specified in schedule I, which shall be considered as a supply even if made without consideration.

Accordingly, supply includes all forms of supply of goods/or services such as sale, barter, exchange, transfer, lease, rental, license or disposal made or agreed to be made.

This implies that supply includes everything, even if a person sale his business assets then GST would be attracted. Although, all forms of supply for a consideration would be covered under GST but if supply is between any related person or distinct persons (section 10) without consideration in the course or furtherance of business, it would also covered under supply. 

As far as importation of services for a consideration is concerned, only importation of service for a consideration of service for a consideration shall be covered under GST regime but there is exception clause which says that if the importation of services from a related person or any of his distinct establishment outside India without consideration, then such supply would also be covered under supply.

Time of Supply of Goods and/or Services

CGST/SGST/IGST shall be payable at the earliest of the following dates, namely:

• the date of issue of invoice by the supplier or the last date on which he is required to issue the invoice with respect to the supply; or
• the date on which the supplier receives the payment with respect to the supply.

Valuation

Transaction value shall be considered for payment of tax, with various inclusions prescribed in the valuation provisions/ rules.

Certain inclusions in the valuation are as follows:

1. Any taxes, duties, cesses, fees and charges levied under any statute (like Basic Custom Duty and Anti-dumping Duty), other than SGST /CGST/IGST.
2. Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the services.
3. Incidental expenses
4. Interest or late fee or penalty for late payment of any consideration of supply.
5. Subsidies directly linked to the price excluding subsidies provided by the Central and State Governments

But shall not include discounts.

Post-supply discounts will not be included in the transaction value if it is established as per the agreement and is known at, or before, the time of supply. Year-end discounts and discounts offered on achieving a target will also be excluded if they could be specifically linked to relevant invoices against which discount has been offered.

Therefore, it is important that the proper planning, accounting and disclosure of ‘discount’ should be made for the exclusion under transaction value. It may be advisable to draft a proper discount policy for smooth calculation and disclosure of the discount in the tax invoices to be issued.

Stock Transfers to be subject in GST

Since transfer of inputs/ capital equipments from one manufacturing unit to another is quite common in this sector. Therefore, manufacturer operating from multiple locations in different States would be required to pay GST on stock/ Assets transfers from its premises in one State to its premises in another State. Further, in case manufacturers are having multiple business verticals within the state and if such manufacturers opts to take separate registration for each such business vertical, then GST needs to be paid for stock transfers even when made within the same State between such business verticals.

(To be continued ......)