Decoding The PAN Puzzle

The new norms regarding quoting of PAN number for all transactions exceeding a specified limit came into force on January 1 this year. While they cover most sectors of the economy, vocal opposition to the move has come mainly from the jewellery industry which believes it will lead to a 20-25 per cent decline in recorded business volumes.

Representatives of jewellers associations from across the country held a meeting in Mumbai last week and decided to take up the issue with the authorities. They say that the existing limits of Rs. 2 lakh on sale of bullion and Rs. 5 lakh for jewellery should be maintained.

The All India Gems & Jewellery Trade Federation (GJF), one of the largest and most prominent representatives of the domestic jewellery industry which convened the meeting, has argued in favour of such differential limits.

It says that bullion is more likely to attract unaccounted money than jewellery as it is easier to monetise, plus can be redeemed at near full value unlike in the case of jewellery where price includes a 15-20 per cent mark up on account of 'making charges' or value addition.

But, its more important contention is that over 70 per cent of buyers from the rural areas will be discriminated against under the new regime. These buyers fall outside the tax system and do not possess PAN cards. As a result they will be unable to legitimately purchase jewellery for festive occasions and weddings, or be forced to do so through illegal channels.

The jewellers also say that the alternative offered by the government - getting non-PAN card holders to fill in Form 60 or 61 - will make the jewellery buying process cumbersome and once again encourage transactions that remain off the record.

They have called for more trade and industry friendly policies where industries can develop and grow to build the economy.

It would be easy to dismiss the protests as an attempt to continue with illegal practices involving cash transactions. This matches with the widespread perception, built largely through stereotyped portrayals in popular media, that the trade is heavily involved in a less than legitimate business.

That however, would be missing the woods for the trees! After all the jewellery industry has its own set of unique characteristics which makes it very different from others - for eg sheer size, spread across the country and deep roots in every local culture and tradition. Till about three decades ago, it was largely unorganised and very localised.

Industry composition is skewed - at one end are a small number of big organised players who use modern methods of manufacturing, retailing and related business practices, while at the other end are huge numbers of small, dispersed jewellers who use traditional methods and often also play the role of money lenders. A large number exist in between, struggling to make a huge leap forward.

Jewellers also have a unique product, one that is both an adornment and a store of value. Large value transactions are fairly common and widespread, and not restricted only to those with high disposable incomes. Even the small buyer often incurs huge expenses on a single transaction, pushed by cultural norms, the need to retain status within the community, the belief that this is also a secure investment and a host of other factors.

Moreover, it is common to see customers trading in old pieces of jewellery acquired perhaps as part of inheritance for something more contemporary; in most cases the old jewellery still retains a high value, allowing the customer to acquire something that may appear disproportionately expensive as compared to other expenses.

Factors like these create an environment favouring cash transactions. Titan for example has said that cash transactions account for 10 per cent of overall turnover (can you imagine an automobile or electronics manufacturer with those sort of figures?); and the percentage can soar to 60-70 in the case of smaller players.

One of the fallouts of this is the unique practice of paying in advance by instalments - a sort of reverse of the loan and EMI-based schemes that all other industries have in place today. Rather than acquiring the product on credit, the buyer deposits instalments upfront against a future purchase receiving some benefit for the interest earned by the jeweller in the process.

While there is certainly a crying need for the greater transparency that the new PAN norms aspire to, there is also a need for achieving this in a manner that matches the practices and requirements of an industry as well.

Of course, jewellers will have to take the lead in this regard. The present situation should be an opportunity to work out alternative ways and means by which both industry interests and the aims of the government can be achieved.