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INDIA DIARY
The Shakeout Will Continue, Growth Will Be Slow
Expect fewer players at the end of the year and don’t expect much growth. But the fundamentals of the Indian gem and jewellery export production industry look good.

Gem & Jewellery Export Promotion Council (GJEPC) chairman Sanjay Kothari expects the shakeout that has been taking place in the diamond processing industry to continue further this year. “The business will pass into still fewer hands by the end of this year,” he says.

This is going to be another slow year, he feels. “There’s been no growth in gem and jewellery exports for fiscal 2006-07,” he says. “Even if we do register a 2- or 3 per cent growth in the figures, it can’t be considered actual growth because you have to factor in the rise in diamond and gold prices.”
Kothari doesn’t think there will be anything like the 10- to 15 per cent growth the industry has shown year after year for some 15 years now due to several problems faced by the industry. Among the biggest of these has been sluggish demand from the US, the largest market by far for Indian gem and jewellery exports. Added to this have been the financial shocks of several large business failures in that market, notably Star Diamond followed by Fabrikant and now LID. “These failures,” he says,” have set us back significantly.”

Despite this, Kothari is optimistic overall. He points out that jewellery exports have registered a 35 per cent growth over the year and this, he says, bodes well for the industry. Also, the Indian industry’s search for new markets seems to be bearing promising fruit (see report on CIS Buyer – Seller Meet, page 74).
The much awaited presumptive or turnover tax on the industry as well as a reduction in duty on the import of polished diamond and coloured gemstones was announced by the government in its fiscal 2007-08 budget presentation to parliament in February. However, the government’s stipulation that the tax would only apply to diamond processing companies and that too only those that showed a profit of at least 8 per cent, are unrealistic, the industry feels. Also, though the duty cut on polished imports is welcome, not doing away with it completely will not allow India to move forward to becoming a trading hub.

“When the entire gem and jewellery processing world is only showing some 3 per cent profit, this stipulation will mean that the whole tax proposal will remain only on paper,” says Kothari. “We are explaining the situation to the government and asking that the norm be reduced to 3 per cent. And we’re not bargaining, hoping to settle for something like 5 per cent. Anything above 3 per cent won’t be practicable,” says Kothari. “We’ve told the government that if they go with a 3 per cent norm, they will see twice the existing tax realisation from the industry. We’ve also told them that they can scrap the whole thing within two years if they think what we’ve said isn’t true.”
According to Kothari, in the wake of the current situation in Antwerp, with the whole industry unsettled, if India offers everyone a level playing field, many diamond businesses including rough sellers will move here. “Antwerp doesn’t have any mines or other access to raw material. The reason everyone is there is because it offers everyone a great platform to conduct a global business from. Mumbai could very easily offer that.”
Kothari also cautions that Dubai, the new entrant on the scene, offers everyone a completely tax-free set-up. “Even switching to a turnover tax doesn’t exactly level the field against a player like that, but we think it will be more than enough given our strengths in diamond processing,” says Kothari.

The Proposed Turnover Tax Doesn’t Level The Field
Venus Jewels chairman Sevantilal Shah assesses the proposed turnover tax for the diamond manufacturing industry.
Though we’ve been waiting for the turnover tax a long time and we’re happy a start has been made, what has been proposed is not going to help at all. The stipulated requirement of a minimum of 8 per cent profit is totally unrealistic. With such a high requirement, the very purpose of the tax is defeated.
Now a turnover tax system should be aimed at bringing about clarity, promoting more tax compliance and finally resulting in an increased number of taxpayers. Added to this, the government will receive higher revenue at a lower cost of administration. Further, the system should be in line with the international practices as it has a significant impact in the global context.
The underlying objective is to enhance the competitive strength of domestic entrepreneurs and provide them with a level playing field with regard to international competition, thus leading to better growth and employment generation. If India is to attract more direct foreign investment and become a preferred centre for the gem & jewellery industry, this sort of system will deliver a much-needed push. But what has been proposed lacks all of the features needed to achieve these objectives. The following example should help explain.
On a turnover of 2 million, a Belgian tax assessee is required to pay 1960. In Indian terms, at the conversion rate of Rs.58 per Euro, the tax amount in Belgium is Rs.113,680 on a turnover of Rs.116 million.

Turnover Net Profit Tax Rate Tax Amount Effective rate on turnover
2,000,000 0.28% 35% 1960 0.098%
Now, on the same turnover of Rs.116 million, as per the proposed Indian turnover tax system, an Indian assessee is required to pay a tax of Rs.2.87 million.
Turnover Net Profit Tax Rate
(Tax + Education Cess)		 Tax Amount Effective rate on turnover
116,000,000 8% 30.90% 2,867,520 2.472%
This is far from creating a level playing field.



 
Indian Diamond Exports & Imports*
 
January-February 2007
January-February 2006
 
US$ mn
carats mn
US$ mn
carats mn
Polished Exports
1,956.38
6.01
1,886.65
6.02
Rough Imports
1,524.75
29.70
1,361.16
9.15
* All figures are provisional