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Will UAE's VAT be a hurdle for its growth as a major diamond hub?

20 november 2017

The recent news that the United Arab Emirates (UAE) will be introducing 5 percent value-added tax (VAT) from January 2018 on both, rough as well as polished diamonds, has stirred and shaken the Indian diamond industry which has close business affiliations with the country.

UAE in recent times has emerged as the world's largest diamond trading hub after Antwerp. If the 5 percent VAT is made applicable, the Indian exporters of polished goods and importers of rough from UAE will have to bear a high tax rate of 5.25 percent, due to the Indian government's GST of 0.25 percent. This will eat into the already wafer-thin profits of the manufacturers, who are in dire straits.

The Dubai Multi Commodity Centre (DMCC) in the last decade has been following a tax-free environment. And, as most of the large diamond companies in India have set up their offices in DMCC, a significant value of rough diamonds is imported from UAE annually. The value of diamonds traded in the UAE rose to $26 billion in 2016, compared with $300 mn in 2002 when the DMCC was established.

So, the possible cost implications for the traders in UAE is huge, prompting Ahmed Bin Sulayem, Chairman of DMCC to comment at the recent Dubai Diamond Conference in Dubai: "Our trading roots trace back to the principles of a tax-free environment for import and re-export and a mindset that industry drives government, not that government drives industry.”

Surprisingly, this decision by the UAE government comes at a time when Dubai is beginning to be perceived as the next big Hub after New York and Mumbai; especially after Antwerp has lost some large diamond companies which relocated to Dubai.

To be fair, the count-down began a few years ago when Antwerp began to lose its position as a gem lender. The exodus of major companies as well as financing banks to the UAE began at a steadfast pace; with the recent successful biennial conference reiterating the popular belief that the Gulf emirate is on track to outpace New York and Mumbai as well.

From a $25.3bn of diamond trade in the first half of 2011, Dubai has grown in leaps and bounds to emerge as a growing hub of $57bn global market, taking advantage of its transport links to India, the world’s biggest diamond importer.

When diamond dealers from the global industry's hub in Antwerp found themselves deprived of the much-needed financing when a major lender closed business, they found a haven in the Middle East. The lending Banks in the Emirates were quick to grab the opportunity, which attracted many companies to set up their businesses in the country.

Many rough trading companies financed by the lending banks made a bee-line to Dubai, which was earlier a pearl trading centre. Rough diamond imports, which were $5.1 bn in the year 2013, shot up to $5.9 bn in 2016, forcing Kimberley Process to set up a system to stop the supply of blood diamonds from war zones into this area.

Now, the expanding diamond financing available in the Middle East is helping Dubai to grow into a major diamond trading hub. When Antwerp Diamond Bank, which funded more than $1.5 billion to the diamond industry for about 80 years wound up its operation, ABN Amro Bank and Standard Chartered Bank also followed suit with plans to leave the industry gradually.

This paved the way for National Bank of Fujairah(NBF) to enter the diamond financing market. Now, in a little more than the last six months, NBF (partly owned by Dubai and Fujairah) has capitalized on the shift in trade from Antwerp to Dubai, by offering loans between $5 mn to $50 mn to diamond traders.

But, will the 5 percent VAT announced by the UAE government be the 'spike in the wheel' for Dubai to become one of the largest diamond hub in the world? One has to wait and watch ...

Aruna Gaitonde, Editor-in-Chief of Asian Bureau, Rough & Polished


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