Kerala Jewellers Federation (KJF) has said that rationalising the tax structure for gold/reducing tax rate to one per cent would help promote the larger principle of a progressive tax system.

It would also be in alignment with the goals and objectives of Goods and Services Tax, the KJF said in a representation to the State government.

Negative implications

Under GST, in all likelihood, gold would be treated in the category of special goods that could either qualify for complete exemption or would be charged at the basic rate.

Reduction of VAT on gold would encourage both the dealers and customers to account all transactions and pay taxes. This would also lead to greater transparency in the VAT system, the KJF said.

It argued that lowering of VAT rates and simplification of the existing compounding system is likely to increase tax revenues and increase compliance.

The higher rate of VAT (five per cent) adversely affects sales and can potentially have negative implications on employment and the overall industry. It is estimated that with every 100-tonne reduction in domestic jewellery sales, roughly 2.5 lakh employees in jewellery manufacture and jewellery retail could potentially lose their jobs.

State’s responsibility

Given this context, it is the responsibility of the State government to protect the gold industry, said MP Ahammed, general secretary, KJF.

He requested the government to review the VAT policy applicable to the industry, and immediately amend the relevant Act.

The compounding tax mechanism is unscientific and places restrictions on the ability of a trader to claim input VAT credit.

This is seriously impacting the prospects of organised retailers and negatively impacting the regional economy.

With the exception of Tripura and Kerala, all states charge a VAT of one per cent for gold, silver and other ornaments or precious metals.

Kerala charges five times the rate prevailing in most states, which has invited unwanted economic effects, Ahammed said.

Black market

This high rate interferes with manufacturers’ input and output choices as also consumers’ consumption preferences.

It encourages stakeholders to device the supply chain structures for tax purpose only and not based on economic consideration.

It also creates artificial preference to one state over another based on tax rates which creates barriers for free flow of goods and services within the country.

A higher VAT rate as compared to neighbouring States combined with the compounding scheme, which is a lose-lose case for the dealers, has created a flourishing black market in Kerala.