Much discussion over the past few days has been focused on the Start Up India policy framework unveiled by the government over the weekend. Most commentators, irrespective of their particular opinions, have welcomed the flexibility shown in accepting that a unique business eco-system such as start-ups requires policies that are tailored to its needs.
Similar flexibility in policy formulation is something the gem and jewellery industry has also been requesting for some years now, particularly in regard to the taxation system. A key proposal relates to the need for a Turnover Tax for the diamond industry to replace the currently applicable tax on income.
An industry delegation once again raised this issue at a meeting with the Finance Minister that took place in Delhi last Friday. Concretely, they suggested a 0.75% tax on sales turnover (computing net income as 2.5% of the turnover, available till 6% of income) in the case of domestic companies.
The industry has argued that such an industry-specific Turnover Tax was necessary because of some of the specific features of the diamond business.
Diamonds are not a standardised product. The quality, size and value of each stone is based on multiple parameters, and these have to be assessed by skilled personnel. As a result generalisations cannot be drawn - similar quantities of rough, for example, may yield a variety of quantities of polished.
Trading is also a complex, industry specific phenomenon. Parcels may change hands, be sorted, assorted and re-assorted a number of times as they pass from rough dealer to polished manufacturers who specialise in different types of goods, and finally to the jeweller. The transactions appear complex on paper, and yet the system has been in place and functioned with a high degree of efficiency for decades together.
Moreover, this is a business characterised by high volumes and relatively lower margins. At the best of times these may be about 2-3%, and during a crisis can even dip to near zero.
Assessing the accuracy of declared incomes and profit rates is only possible for someone with a deep understanding of how the trade works.
Inevitably, this has led to numerous stand offs between the trade and the tax authorities on issues such as these, leading to multiple tax-related litigations as well.
Add to this are disputes related to record keeping for transfer pricing; imposition of both Import duty and service tax on the same goods; non-refund of service tax paid on exports and so on. Such uncertainty related to taxes impacts smooth business operations.
A turnover tax will increase transparency and simplify records and procedures. Industry sources also say that it will probably lead to higher tax revenues.
This year there is a new aspect related to taxation - the demand that sale of rough diamonds through the Special Notified Zone (SNZ) recently set up at Mumbai be allowed by implementing a 0.25% tax on the sales turnover achieved by foreign mining companies within the zone.
While the turnover tax for domestic entities will bring Indian companies on par with those in competing centres such as Israel and Belgium, it will also attract a fair quantum of FDI. Similarly, a tax on sales at the SNZ will expand the tax net for the country.
The setting up of an SNZ is an indication that government is willing to look at systems and structures based on specific needs of the industry. The industry is hopeful that tax reforms will follow.
Columnist
He has been a journalist since the mid-1980s, and has spent close to two decades tracking the gem and jewellery industry while holding different editorial positions in industry specific publications and websites
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