The GST Council will meet in Ahmedabad on June 3 to discuss the tax rates on a few items, including gold. Currently, there is a wide divergence between the Centre’s and states’ view on taxing gold. While the Centre wants the tax to be lowered to check smuggling, the states want it to be around 5% to earn additional revenue. Chief economic adviser Arvind Subramanian had also suggested 4-6% GST on gold, as it would help lower the tax on scores of other items. Traders on the other hand wish to have a sub-2% GST on gold. The All India Gems and Jewellery Trade Federation has called for a 1.25% GST, but bullion traders want the import duty on the metal halved.
In an interview with Jyotsna Bhatnagar, Arvind Sahay — professor of marketing and international business at the Indian Institute of Management, Ahmedabad, and also the head of the India Gold Policy Centre at IIMA — puts forth his thoughts on the way the potentially volatile issue can be handled. Excerpts:
What is the ‘relevant transaction’ concept for GST on gold in India?
There are four primary transaction levels for gold in India. First is the import transaction. India imports 99% of the gold it consumes every year through nominated agencies (in 2016-17 it officially imported about 650 tonnes). This attracts a customs duty of 10%, and provides tax revenue of about Rs 20,000 crore. The second level of transaction is from the nominated agencies to the jewellers, bullion traders and refiners. The third level is from the jewellers to consumers and from bullion traders to jewellers and refiners. And the last transaction level is that of recycled gold. About 100-200 tonnes of gold gets recycled every year. Apart from customs duty, gold attracts an excise of 1% on manufacture and 1% on sale. The 2% total tax apart from customs fetches the Centre an estimated Rs 4,000-Rs 6,000 crore of tax revenue.
What policy objectives should drive the GST rate for gold?
The government would need to balance five objectives. The first is to have a modicum of tax revenue stability so that the tax revenue does not fluctuate too much from the current levels. The second would be to ensure that the current account deficit (CAD) does not balloon as a result of tax changes, as it did in 2013 when CAD touched almost 4% of GDP. The third objective would be to make sure that there is increased transparency and traceability of gold transactions. The fourth would be to ensure a fair share of the taxes for the state governments. And the fifth objective would be to promote exports of gold jewellery.
So, what should be the GST rate for gold and what should be the customs duty?
Given the current economic growth scenario and the estimated future prices of crude oil (crude oil and gold are principal contributors of CAD), this aspect should not be a concern. Therefore, Customs duty should go or at least substantially reduced. In any case, customs duty above the level of 3-4% encourages smuggling which was estimated at more than 150 tonnes in 2016-17 by the World Gold Council. A zero Customs duty may lead to an initial surge in imports, but in the face of strong economic fundamentals and stable CAD, gold consumption will stabilise. Anywhere from zero to 3-4% Customs duty appears ideal. This would mean a tax revenue of up to Rs 7,000 crore.
A 5% GST levied at the second transaction level (from nominated agency to jewellers, refiners and bullion traders) would mean about a tax revenue of Rs 12,000 crore. It would also reduce prices to the final consumer and lead to some increase in the sale of gold.