Why jewellers are returning to the unorganized sector

They are now scaling or shutting down their businesses because they can’t compete with untaxed grey market gold.
India’s gold smuggling has increased significantly since the import duty was increased in the Union Budget 2019 in contravention with the broader market expectations of a cut.

Jewellers are turning to the grey market to sell smuggled bullion or jewellery at a discount, escaping a 15.5 per cent duty they have to pay in their legitimate business.

Demonetisation in November 2016 and the introduction of Goods and Services Tax (GST) in July 2017 spurred jewellers to register as small and medium enterprises (SMEs) or micro, small and medium enterprises (MSMEs), but they are now scaling or shutting down their businesses because they can’t compete with untaxed grey market gold.

There is a 15.5 per cent (12.5 per cent of import duty and 3 per cent of goods and services tax or GST) tax on legitimate gold.

Thus post demonetisation and GST levy, the Rs 475,000 crore jewellery industry in India had seen a sharp increase in contribution of organised sector players.

Their share shot up to 60 per cent in the last few years.

New comers on formal businesses are gradually going back to their unorganised sector business by closing down their existing business.

The process of the shift has begun even before budget.

Thousands of jewellery manufacturing units have shut down their shops in the last few months.

“The prevailing duty of 15.5 per cent is too attractive for grey market players.

"The recent import duty increase has put organised sector players at a huge disadvantage.

"Over the last few years, there has been upto 100 per cent jump in jewellers issuing bills, paying taxes etc, thus shifting to organised sector.

"But, post this duty increase, there will be more players in grey market and activities like shutting down of shops in organized sector would intensify, (if) not immediately but gradually,” said Somasundaram PR, Managing Director (India), World Gold Council (WGC).

WGC estimates India’s gold smuggling at 100 tonnes for the last few years which, according to trade sources, has increased significantly since the import duty was increased in the Union Budget 2019 in contravention with the broader market expectations of a cut.

“Shifting of organised sector to unorganised is easy but not the reverse migration due to huge amount of risk involved in it.

"There could be a gradual shifting of organised players to unorganised sector,” said Somasundaram.

Jewellers estimate a total annual tax collection of Rs 35,000 crore through gold import which remained stagnant for the last few years.

The increase in import duty has helped growth of the parallel gold economy through bullion import for duty evasion.

In Mumbai market unofficially imported gold is sold at 1.5 to 2 per cent cheaper to official gold.

“Jewellers shifting from organised to unorganised sector players has already started.

"Thousands of manufacturing units have been shut down over the last few months.

"Some of them have closed their shops for ever while others in part.

"The situation across jewellery industry is very paradoxical,” said N Anantha Padmanaban, managing director of Chennai based NAC Jewellers and chairman of All India Gems & Jewellery Trade Council (GJC).

To apprise the ongoing situation in the jewellery sector, the GJC delegation will soon meet the ministry of finance to devise a solution to the ongoing problem.

Photograph: Shailesh Andrade/Reuters