GST was meant to simplify Indian tax regime by unifying the entire country into a single market with one tax rate. However, what is being implemented this week is a web of tax with seven different tax slabs and numerous cess rates on luxury items and sin goods. One key item of contention which drew much discussion on the rate of tax under the new GST regime, with opinions sharply divided across the spectrum, is gold.
The government, apparently in its quest to roll out GST without any further impediments, agreed to a tax rate of 3% on gold under GST, which is lower than the lowest tax slab of 5%, and is closer to the current tax incidence of about 2%. In turn, it created an entirely new tax slab of 3% for a single item — gems and jewelry — in addition to the four tax slabs decided for all the other items.
“There was extensive debate on gold, and between 2% and 5%, there was almost a vertical division. A consensus has been reached at 3%,” Finance Minister Arun Jaitley said in June 3, while announcing the rate of tax on gold.
Gold currently attracts 1% excise, and 1% VAT, apart from a 10% import duty. By keeping the GST at 3% along with the provision of input tax credit, the GST Council has ensured that the tax burden on the precious metal does not change significantly after the implementation of GST on July 1.
“The 3% GST rate for gold and gold jewelry though would result in a slight increase of about 1% additional tax, but at the same time the dealers would be able to take input tax credit, which is an upside,” Harpreet Singh, Partner, Indirect Tax, KPMG in India, said after the rate of tax on gold was fixed at 3%. “Overall, I think the Government has done a good job by not changing the rate drastically, as gold is a sensitive item,” Singh said.
Notably, the traders’ lobby had been demanding to keep the levy on the precious metal at close to a concessional rate of 1%. Market experts had expressed concerns that a higher tax rate on gold will only add to the already high proportion of cash transactions on the commodity, and will increase gold smuggling with most traders choosing to evade taxation altogether.
“The GST council did a sensible job in fixing the rate of gold, silver and diamonds at 3% and rough diamonds at 0.25%,” Sachin Menon – Partner and Head, Indirect Tax at KPMG in India, said after the June 3 meeting for fixing gold tax rate. “The move clearly indicates that GST Council has been considerate of the industry concerns. A higher rate would have enhanced tax evasion and smuggling,” he had said.
A higher tax rate could have prompted people with propensity to evade taxes to keep the transactions completely out of the tax net, as had happened following demonetisation. When Narendra Modi demonetised high value currency notes, people turned to convert their black money to gold overnight. Gold demand in November surged, with the import of the yellow metal doubling to over 100 tonnes in the month.
On the other hand, keeping the tax incidence under the new regime close to the current levels could encourage several small and unorganised players to move to an organised reporting structure, widening the tax net and bringing additional revenue for the government.
Further, Jaitley would also not want to do anything that could revive gold smuggling, which is otherwise on a decline following measures such as a clampdown on black money, increasing formalisation of the economy, etc.