he All India Gems and Jewellery Trade Federation (GJF), an industry body which represents more than 300,000 jewellery manufacturers, wholesalers and retailers, has strongly opposed certain structural changes in the direct tax system that were proposed by the finance ministry in a white paper. The GJF is seeking modifications in the Direct Taxes Code (DTC) pertaining to search and seizure provisions; a 2 per cent tax on gross assets; and a 10 per cent tax deduction at source (TDS) on all payments. The proposed tax code states that an authorised officer has power to seize any stock in trade of bullion, precious or semi-precious stones or jewellery found as a result of the search.

“The seizure of stock in trade would result in the disruption of business activities in the retail, wholesale and manufacturing process. It would also result in the collapse and paralysis of the business activity, leading to irreparable loss of image for the jeweller in the industry and with his consumers,” said former GJF chairman Ashok Minawala, while addressing a press conference on the sidelines of the Jaipur Jewellery Show (JJS).

“The industry depends on finance from banks and financial institutions for the working capital requirements of the business. The raw materials and jewellery are mostly procured on credit from the suppliers. The seizures would cause the companies to default in their repayment commitments to the suppliers, banks and financial institutions, leading to the freezing of accounts and assets by banks,” he added.

Minawala noted that the proposed provisions seek to discriminate between the gem and jewellery industry and other industries and that the seized stock has no relevance to tax addition. “No other industry has seizure of stock in trade. This expresses the predetermined perceptions of the government with regards to the gem and jewellery industry,” he remarked.

GJF chairman Vinod Hayagriv said in a statement, “Such a classification merely on the basis that the stock in trade of the industry is of high value as compared to its other assets, does not warrant subjecting the industry to stringent and drastic seizure provisions and such a classification will not stand the test of reasonability in relation to the object of the legislation.”

The GJF is also objecting to the proposed 2 per cent tax on gross assets, or minimum alternate tax (MAT), saying that the industry already operates on small margins with high inventory levels. The GJF, which estimates the domestic jewellery market size at around $24 billion (Rs.112,000 crore), argues that shifting the tax base from ‘book profits’ to ‘gross assets’ will result in the levy of tax on companies irrespective of whether they are earning any profit.

“The tax based on gross assets is like a wealth tax on our business. The gem and jewellery industry is a high asset base industry with low profit margins. The proposed provision substantially increases the gap between tax payable on gross assets and tax payable on taxable income,” Minawala stated.

The GJF has also come out strongly against the government’s proposal to deduct 10 per cent tax from suppliers on all payments made for gold, diamonds and jewellery, saying it would result in the blockage of working capital for the industry which is facing a major liquidity crunch.

“TDS will now be deducted from all suppliers at 10 per cent. So every supplier will only receive 90 per cent of his invoice amount, while the rest will go against TDS. The fallout of this would be increased dependence on borrowed funds thereby leading to increased interest costs. Further, considering the large number of transactions, the requirement of filing periodic returns will add to the cumbersome compliance procedures,” he noted............