EY study asks Kerala to set right tax anomaly on gold sales

Kerala Budget 2015 offers a good opportunity for the Sate to set right the tax policies on gold trade and bring back the lustre to the industry, an analysis by consultants EY has said.

The gold industry is in turmoil for the last couple of years, mainly due to restrictions on gold imports, increased custom duties and the highest rate of VAT in the country.

The present VAT rate of 5 per cent on sale of gold has become a dreadful experience for both gold retailers and consumers, the analysis said.

The VAT rate was increased from 1 per cent to 4 per cent in 2006 and later to 5 per cent. Widespread evasion of tax and low mobilisation of revenue from the gold sector were cited as the provocations.

This was not without any logic either. The reported turnover of gold sales was ₹10,000 crore in 2005-06 and the potential tax revenue, even if charged at 1 per cent should have been ₹100 crore.

The actual VAT collected in the same year was only ₹21 crore, the analysis said. But the move to set right the anomaly by increasing the VAT rate to 5 per cent does not appear to have met with the expected success.

The gold industry in Kerala speculates that overall business turnover for the year 2013-14 is somewhere in the range of ₹70,000 crore to ₹80,000 crore.

VAT collections were estimated at a meagre ₹471 crore for 2013-14, which works out to less than 1 per cent of the speculated revenue in spite of the higher VAT.

The high rate also results in customers preferring adjoining States for purchase of gold. All neighbouring states charge VAT at 1 per cent.

As per industry sources, the gold business in Kerala has since plummeted by 30- to 40 per cent in the last couple of years due to higher gold price, the primary reason being the high VAT rate.

The gold trade in Kerala is also going through more heartburn by opting for the compounding scheme under the Kerala legislation for payment of VAT.

The difference in computation mechanism for payment and collection of VAT causes a distortion in the flow of VAT and dealers usually end up paying more tax.

A high VAT rate and an unmanageable compounding scheme are giving a hard time to the exchequer and the industry.

It could also have socio-economic implications on employment of artisans and store-front employees and investments into the State.

Major jewellers and trade associations in Kerala have made representations in the past to reconsider the VAT rate or payment of VAT under the compounding scheme based on the current turnover.

The State government is yet to act on the matter. Given the downturn in the Kerala gold market, it is imperative that the State government acts on either of these, the EY report said.

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