GST may impact gold demand in short term: WGC

New Delhi: The net impact of GST in the world's largest gold consumer market would be "positive" even as there will be short-term challenges, affecting not only the demand but also manufacturers/retailers' working capital and recycling business, the World Gold Council (WGC) said today.

The government is planning to roll out goods and services tax (GST) from July 1. Currently, taxes on gold jewellery stands at 12.2 per cent. This will be replaced with GST of 3 per cent, which will be on top of the import duty.

"This is the biggest fiscal reform since India's liberalisation in the early 1990s. While gold consumers will face a slightly higher tax rate, and the industry will go through a period of adjustment, we see the net impact on the gold industry as being positive," WGC said in its report.

While it could present short-term challenges to the gold industry, "we believe it will boost the economy and make the old industry more transparent to the benefit of gold buyers".

This should support India's gold demand, which we expect to be between 650-750 tonnes in 2017, rising to 850-950 tonnes by 2020, it added. In the short term, WGC said GST may be disruptive as the industry adjusts to the new tax regime.

Manufacturers' and retailers' working capital could be tied up because of inter- state gold stock transfers. Small-scale artisans and retailers with varying degrees of tax compliance may struggle to adapt.

"Consumer demand faces a headwind from the higher rate of tax. And consumers and jewellers may try to conduct recycling transactions under the counter, away from the prying eye of the tax man," it said.

But the positives are significant, the WGC said and noted that GST should eliminate double taxation and improve supply chains efficiency.

"GST can make the gold industry more transparent which, coupled with recent hallmarking legislation, should ensure gold buyers have confidence in the gold products they buy, rather than continuing to suffer from the gross level of under-carating they have previously endured," it added.