The Finance Minister Gets Cracking On Jewellers...

India imported over 900 tonnes of gold in 2011, putting pressure on the current account deficit. The affair with gold is now under scrutiny from the government and RBI. While the budget doubled import duty on bullion and non-standard gold and slapped a cess on unbranded jewellery, inviting protests, RBI has tightened norms for gold-based lending NBFCs. It has capped their loan-to-value ratio at 60 per cent for loans against gold jewellery. The message is clear: reduce gold's allure and direct Indians to ‘productive' investments.

The government may be forced to withdraw the 1 per cent excise duty on unbranded jewellery it proposed in the budget. Since 17 March, bullion traders and jewellers across the country have shut shop in protest; and both the government and trade analysts have been taken aback by the intensity of the backlash. Coal minister Sriprakash Jaiswal added fuel to the fire by attending one such protest rally in Kanpur and likened government departments to "mosquitoes sucking blood".
"Jewellers are not in a mood to open their shops; the artisans are even willing to wind up business," says Bachhraj Bamalwa, chairman, All India Gems & Jewellery Trade Federation.

The budget stipulation for providing PAN numbers and imposing tax on all retail cash sales of Rs 2 lakh or more has also drawn sharp ire.

"Effectively, this is a 0.3 per cent tax on all jewellery as the 1 per cent impost is on 30 per cent of  annual production. For branded jewellery, that has the accounting systems and factory manufacture, this is a reduction; but for the small family businesses, it will be a huge compliance burden," says Bamalwa. Trade sources estimate that 97 per cent of all jewellery manufacture is in the small and unbranded sector.

On gold, traders say there has been a double whammy in the space of three months with customs duty being raised from 1 to 2 per cent on 20 January and then again doubled to 4 per cent in the budget. Besides making gold products more expensive, the import duty hike will also encourage smuggling, says the Gems & Jewellery Export Promotion Council.
Finance minister Pranab Mukherjee's statements in Parliament (after the widespread protests) indicate that he is ready to modify some tax proposals to do with unbranded jewellery. Mukherjee has, however, insisted there will be no rollback on his customs duty proposals considering that the huge import of gold has been the primary driver of the current account deficit in the economy.

(This story was published in Businessworld Issue Dated 09-04-2012)