Even as consumers will face a slightly higher tax rate in gold, after the Goods and Services Tax (GST) is rolled out this July, the overall impact on the gold industry will be positive, World Gold Council said on Thursday.
"On 1 July, India's labyrinth of taxes will be replaced with a simple, nationwide GST. This is the biggest fiscal reform since India's liberalisation in the early 1990’s," WGC said in a report.
While gold consumers will face a slightly higher tax rate, and the industry will go through a period of adjustment, we see the net impact on the gold industry as being positive.
WGC said the gold supply chain will become more transparent and efficient, and the tax reform could boost economic growth, which is likely to support gold demand.
The country's gold market is becoming more organised and transparent, and it is likely that GST will accelerate this process, which will be good for consumers, it said.
They can have more faith in the gold products they are buying, and this, in turn, can support gold demand in the years to come.
Industry also has reacted positively to the 3 percent GST rate, it said, adding there were fears that it could have been higher – perhaps 5 percent or more.
This would have had a damaging effect on consumer demand, and more importantly, would have meant many small and independent retailers would have done their best to avoid it. The 3 percent rate is reviewed as being more manageable and will ensure greater compliance by small and independent retailers.
The report also said the gold market is highly fragmented in the country, and the jewelry retailing landscape is dominated by small businesses, as regional and national chains only account for around 30 percent of the market.
The picture in jewellery manufacturing is more extreme, with 95 percent of the industry consisting of small-scale operations, it added.
However, this is changing, and in recent years, large retailers and manufacturers have been gaining market share, it said.
It is likely that GST will accelerate the pace of consolidation. Firms that currently outsource manufacturing services from artisans and incur the 18 percent GST rate may look to develop in-house capabilities. Small jewellery shops, which may have illegally benefited by not paying tax, will lose that advantage, and large retailers can compete on a level playing field.
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