GST or Goods and Services Tax was introduced by the Government of India on 1st July 2017 to control the cascading effect of taxes on the common man. The primary objective of the Goods and Services Tax is to unify the previous repetitive tax structure of the indirect tax regime and to ensure complete transparency in the taxation system. As a result, GST was enforced to minimize the burden of taxes.
GST has been classified into two categories:
Central GST or CGST paid to the Central Government
State GST or SGST paid to the State Governments and Union Territories
The new system of taxation in India is expected to be a breath of fresh air for the Indian citizens, as it has replaced repetitive taxes like VAT (Value Added Tax), Customs Duty, Central Excise Duty, etc. Three tax slabs have been proposed by the government under the new tax regime.
The effect of GST on the prices of goods and services is apparent. Gold, a commodity with immense significance in India and globally, is definitely one of the products that have been impacted by the new tax structure. The high incidence of taxation on gold had led to a debate among analysts. They were divided in their opinions that the rise in gold prices post-GST would cause a decline in demand for the yellow metal. The GST on gold was fixed at 3%, along with additional 8% tax applicable on making charges. The making charge was then revised to 5% as a result of the furore among experts.
The introduction of GST, as an effort to control the cascading effect of taxes, has borne fruits for most goods and services. However, the effect of GST has not been replicated in the case of the yellow metal. This may be the result of the import duty applicable on gold, which has been fixed at 10%. This is over and above the 3% GST and 5% making charges on gold. Besides, the consistently rising gold rate is a reality due to the constantly increasing demand for the metal in the global market. Like it is always, this demand is expected to witness a steeper rise and major downward fluctuation of price is not a common phenomenon in the gold market.
GST on Gold for Purchase
The revised tax slabs of GST on gold, as announced on June 3rd, 2017, have been set at a rate of 3%. This implies that all gold products, both finished and unfinished, will be taxed at a rate of 3%, payable by the end consumer.
GST on Gold Making Charges
Apart from the GST on gold and gold-related products, there is an additional tax charged on making charges of gold jewellery at a rate of 5%. This is sharp contrast to the lack of making charges on gold jewellery in the pre-GST era. Only the making charges, which is usually accounted to about 12% of the total cost of the finished product, were applicable.
The GST on gold making charges, which was initially fixed at 18%, was ultimately revised and reduced to 5% after appeals from jewellery institutes and bodies of authority. Since the entire tax burden is passed on to the end consumer, a GST on gold marking charges as high as 18% would mean a steep rise of the finished gold product for customers.
GST on gold
There has been a significant rise in gold prices as a result of the 3% GST that has been charged on 10% of import duty. This has made the yellow metal expensive by 0.75% post-GST, as a result of this reason. Before the implementation of GST, the applicable rate of interest was 2%, which included 1% service tax and 1% VAT.
GST on gold import
Gold import is another reason behind the soaring gold prices. Importing the yellow metal from countries like South Korea has enabled gold traders to make the most of the privileges that the new taxation system offers them. India shares the Free Trade Agreement with South Korea, which authorizes importers to ship in gold without having to pay a 10% customs duty.
GST on gold from the organized sector
Approximately 30% of the gold trade is believed to be a part of the organised sector in India. GST is expected to ensure transparency and accountability in the organized gold sector. However, at the same time, the apprehension is that it might push market players from the organized gold sector to switch over to the unorganized areas. They may be encouraged to sell their gold products without offering receipts on purchase and even use gold that is comprised on its purity and quality.
GST on gold from the unorganized sector
An estimated 700-800 tonne of gold is imported to India every year with a significant part of it been secured through illegal means. Increased operations in the unorganized sector mean that market players may be tempted to import gold through unfair means and then sell their gold products here as per the increased taxes implemented by GST. However, the GST tax regime makes it mandatory for businesses to report every transaction for claiming of input credit, restricting the unorganized sector to resort to illegal practices. Appeals are also being made for the government to review and reduce the interest rate on gold imports to 6% like it was before the enforcement of GST.
The below illustration shows the comparison between the tax slabs before and after the implementation of GST:
| SR. No. | Particulars | Pre-GST | Post-GST |
|---|---|---|---|
| 1 | Price of gold | 100 | 100 |
| 2 | Custom Duty | 10 | 10 |
| 3 | 1+2 | 110 | 110 |
| 4 | Exercise (1%) | 1.1 | 0 |
| 5 | 3+4 | 111.1 | 110 |
| 6 | VAT (1.2%) | 1.3 | 0 |
| 7 | 5+6 | 112.4 | 110 |
| 8 | GST (3%) | 0 | 3.3 |
| 9 | 7+8 | 112.4 | 113.3 |
| 10 | Making charges (12% of 1+2) | 13.2 | 13.2 |
| 11 | 9+10 | 125.6 | 126.5 |
| 12 | GST on Making Charges (5%) | 0 | 0.7 |
| 13 | Total Cost (11+12) | 125.6 | 127.2 |
| 14 | Total Taxes & Duties (2+4+6+8+12) | 12.4 | 14 |
What is the difference between the gold making charges before and after GST?
Added to the GST on gold and gold-related goods, there is a separate tax levied on making charges of gold jewellery at a rate of 5%. Before GST, there were no taxes that were imposed on the making charges of gold jewellery. Only the making charges, which usually accounted to about 12% of the total cost of the finished product, were applicable.
The GST on gold was primarily fixed at 18%. But constant appeals from jewellery councils and authorities to reduce the steep hike in the tax rates led to it being minimized to 5%. The entire tax burden is passed on to the end consumer. A GST of 18% solely on making charges would have meant a steep hike of 4% on the finished gold product for end customers.
What is the GST on gold purchase?
The revised tax slabs of GST on gold, as announced on June 3rd, 2017, have been set at a rate of 3%. This implies that all gold products, both finished and unfinished, will be taxed at a rate of 3%, payable by the end consumer.
What is the difference between the tax rate on gold jewellery before and after GST?
The tax rate on gold jewellery was approximately 12% before the implementation of Goods and Services Tax and comes to 14%, inclusive of import duty making charges, etc., after the enforcement of GST.
How does GST on gold imported from outside India impact the final price of gold jewellery?
Gold import is one of the primary factors that is increasing the prices of finished gold jewellery. India does not have sufficient gold reserves to meet the demands from within the country. Therefore, it is essential for India to import gold to keep up with its requirements. However, post-GST, importing gold from countries like South Korea may be misused by gold traders. This is because India shares the Free Trade Agreement with South Korea that enables them to import gold into the country without having to pay a 10% customs duty. Gold jewellery manufactured from this imported gold attracts taxes as per the new GST on gold when it is purchased by consumers. Hence, gold players across the supply chain – agents, distributors, manufactures, etc., are enjoying further profits.
However, the government has made it mandatory for gold businesses to submit reports of every transaction for claiming of input credit. This measure prevents the unorganized sector to use illegal means for importing gold. While GST on gold imports have been hiked to 10%, appeals are being made to the government by gold institutions and councils to revise and bring down the rate to 6%, as it was before the implementation of GST.
