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A study in contrasts

Rajiv Bhuva | Print Edition: May 27, 2012

Even as bullion traders and jewellers from the unorganised sector went on a strike to protest duty hikes proposed in the Union Budget, the 147-year-old branded jewellery house, Tribhovandas Bhimji Zaveri (TBZ), was busy preparing for an initial public offering (IPO).

The contrasting responses indicated just how the two sub-sectors expect to be impacted by Finance Minister Pranab Mukherjee's Budget proposals. Mukherjee has proposed to impose a one per cent excise duty on unbranded jewellery [the branded kind has been attracting the one per cent duty since 2010/11] and has doubled the import duty on gold to four per cent.

He also recommended tax collection at source on cash purchases of bullion or jewellery in excess of Rs 2 lakh. Essentially, the proposals aim to pare the massive gold import bill - currently in excess of $58 billion - and curb the use of black money in jewellery purchases.

Shrikant Zaveri, Chairman, Tribhovandas Bhimji Zaveri
The new regulations will bring in more transparency and accountability: Shrikant Zaveri Photo: Rachit Goswami
While the entire industry will be affected by the import duty on gold, the excise duty and tax collection will largely affect the unorganised/unbranded sector, which, according to CRISIL Research, accounts for 90 per cent of the retail jewellery market in India. Ergo, the protest. The jewellers' strike continued for 21 days, ending only after Mukherjee promised to consider their demand for a rollback of the excise duty.

For the branded sector, it was business as usual. TBZ'S IPO was oversubscribed by 1.15 times. "The new regulations will bring in more transparency and accountability," says TBZ Chairman Shrikant Zaveri, who spoke to BT after the IPO.

If anything, the organised sector is in expansion mode. TBZ plans to increase its store count from 14 to 57 over the next three years. Madurai-headquartered Thangamayil Jewellery plans to open 12 stores in tier-2 cities in South India, according to its Joint MD, Ba Ramesh. Titan Industries has already added 102,000 square feet of retail space for its jewellery brand Tanishq. According to a Citi Research note, it will add another 250,000 square feet through 50 new stores this fiscal. Bangalore-headquartered Rajesh Exports, which operates 76 retail stores in Karnataka under the Shubh brand, plans to open 25 new stores in the next four months.

The branded lot is expecting to gain from the government's new regulations. "These changes will not hurt organised players," says Siddharth Mehta, Chief Strategist at Rajesh Exports.

The real issue for the unorganised sector is the excise duty - not so much because of the outgo as because of compliance issues. While the levy will inflate gold prices by 30 basis points, the annual excise collection will at best amount to Rs 200 crore, a relatively small amount. "Compliance will be a major challenge," says Bachhraj Bamalwa, Chairman, All India Gems & Jewellery Trade Federation (AIGJTF), alluding to the huge amount of paperwork that will be involved.

"It is the central excise enforcement that is our concern," adds S. Venkatesh Babu, President of the Bangalore Jewellers' Association. The excise department is the final authority to decide on enforcement and the industry fears raids by its inspectors. "We will go back to the Licence Raj," says Rajiv Jain, Chairman of Gem and Jewellery Export Promotion Council.

Siddharth Mehta, Chief Strategist, Rajesh Exports
The changes proposed in the Budget will not hurt organised players Siddharth Mehta Photo: Deepak G . Pawar
The other issue is around the tax collection at source for purchases over Rs 2 lakh. Even here, consumers could become compliant over time.

"PAN disclosure has been mandatory for purchases above Rs 5 lakh for almost a year. The industry has reported a minimal impact on that front so far," says Tapasije Mishra, MD & Group CEO of IDFC Investment Bank, TBZ'S merchant banker.

But not all buyers have it - there were less than 14 crore PAN holders in the country as of November 2011. And even they may not want to come under the taxman's radar, reducing the unorganised sector's revenue.

Some are worried about the impact of the proposed four per cent increase in import duty.

"One of the primary drivers of the current account deficit has been the growth of almost 50 per cent in imports of gold and other precious metals in the first three quarters of this year," said Mukherjee, spelling out the rationale for the hike in his Budget speech.

But Mishra feels the impact may not be severe.

"The increase in duties may dampen demand for a few months, until consumers get used to higher prices. Since a large portion of jewellery buying in India is wedding and festival driven, a steep drop may not be seen."

Demand, in fact, had fallen well before the Budget. According to the World Gold Council (WGC), jewellery consumption in India fell by 44 per cent to 103 tonnes, while demand for gold bars and coins shrank 38 per cent to 70 tonnes during the three-month period that ended in December 2011. Demand continued to remain sluggish at the start of this calendar year but is now showing signs of recovery, says a WGC report.

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