India’s Gem Of A Challenge To Belgium & Israel

(via Times News Network) K G Narendranath writes:

A committee comprising the Central Board of Direct Taxes and the commerce ministry is working on a tax regime that will address the complex valuation issues peculiar to the $17.5-billion gems and jewellery industry that thrive on exports.

However, the exercise, which follows a Budget 2007 announcement, is likely to fall short of a complete shift to turnover-based taxation, as was mooted by the commerce ministry and the industry earlier. According to sources, what is being considered is a “simpler tax assessment scheme” which will factor in the reality that it is difficult to lay down standard input-output norms for this industry.

In the last Budget, the import duty on cut and polished diamonds was knocked off, with a view to giving a fillip to the efforts to make India a global diamond trading hub like Belgium and Israel. Currently, even as India’s diamond cutting and polishing abilities are doubtless the best in the world and cost of such processing is one-fifth of diamond-rich South Africa’s, the country’s huge dependence on imports for rough diamond is preventing it from becoming a trading hub.

Also, the present tax on income is onerous because of grossly fallible assessment. The Budget decision to let duty-free import of cut and polished stones has proved to be a shot in the arm for the sector. A shift to turnover-based tax is the next logical step, which would go a long way in developing India as a global diamond trading hub.

Countries which are serious players in diamonds have tax regimes compatible with this industry’s inherent disinclination to stick to standard value addition norms for tax purposes. It is globally appreciated that it is difficult to gauge value addition in diamonds. Dubai and China keep very low taxes on diamonds. Many other countries, including Belgium, which is the largest diamond trading hub with exports of $23 billion a year, have turnover tax instead of income tax on diamond businesses.

There are countries which tax diamond traders’ income based on presumptive valuation to avoid the rigorous and erroneous valuation that could stifle the industry. It is clear that turnover-based taxation addresses valuation issues better than income tax. As India’s policymakers envision the country becoming as global diamond trading hub, they don’t need to worry about a revenue drain. A sudden increase in the industry’s turnover (the sector is growing at a CAGR of 20% even now) would enhance tax revenue.

Even though global diamond companies like Rio Tinto and De Beers operate in India and are keen to tap India’s cheap and highly skilled processing ability, they still don’t augment their investments in great measure, as the country is yet to be a trading hub. Traditionally, the domestic industry has confined itself to processing of rough diamonds imported from Australia and SA into cuts and polished diamonds, and exporting these items to a large number of countries including the US and the EU. Cheaper imports of cut diamonds have now enabled greater product differentiation and augmented trade with or without major value addition.

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