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What will be “not right” in Russia with small jewellery business?

31 october 2022

Economic entities of small and medium enterprises (legal entities and individual entrepreneurs) included in the Unified Register of SMEs are at (https://rmsp.nalog.ru/search.html?mode=extended#).

analyt_31102022_1_eng.png  

Another factor for inclusion in the list of SMEs is the share of participation in the capital, which should not exceed 49%, in particular, for ordinary legal entities (including foreign ones).

The Unified Register of SMEs makes it possible to trace the number of entities according to the OKVED (Russian National Classifier of Types of Economic Activity) code. The jewellery sector includes the activities of market entities according to the following OKVED codes:

- 32.12. - Manufacture of jewellery and similar products;

- 46.48.2 - Wholesale trade in jewellery;

- 46.72.23 - Wholesale trade in gold and other precious metals;

- 46.76.4 - Wholesale trade in precious stones;

- 47.77.2 - Retail sale of jewellery in specialised stores;

- 95.25.2 - Jewellery repair.

The Internet resources contain no archive of data on this issue, but the author of this material has recorded the statistics for the last 5,5 years, from May 2017 through October 2022. During this time, the number of SMEs in the jewellery industry operating under the abovementioned OKVED codes decreased by 40.1%, from 18,346 to 10,987:

Number of SMEs in jewellery sector

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Blue - Retail. Light brown - Wholesale. Grey - Manufacture.

 

It is noteworthy that over the same period, the total number of SMEs in the Russian Federation decreased from 6,080,091 to 5,881,027 units, i.e., only by 3.3%. In other words, the rate of decline in the number of SMEs in the jewellery sector in this period turned out to be 12 times higher than the rate of decline in SMEs in the economy as a whole:

analyt_31102022_3_rus_eng.png

Black - Number of SMEs in jewellery sector. Light brown - Total number of SMEs.

май - May. авг. - Aug. ноя. - Nov. фев. - Feb.

For convenience, the total numbers of SMEs in the RF are scaled to the number of SMEs in the jewellery sector.

Although the trend towards a decrease in the number of players in the Russian jewellery market has been observed for a long time, certain structural changes have appeared with the onset of the Russia’s special military operation (SMO).

Data on the number of SMEs operating in the jewellery sector as of May 10, 2022, shortly before the start of the SMO:

analyt_31102022_4_eng.png

Data on the number of SMEs operating in the jewellery sector as of October 10, 2022:

analyt_31102022_5_eng.png  

It is expected that the number of SMEs in the jewellery sector amid the increased anxiety in society is at least not growing due to a decrease in the jewellery consumption and a lower market players’ confidence in the success of their business in future. Moreover, the number of players in the market of suppliers of raw materials for the jewellery manufacture - of precious metals and precious stones (by 8.6 ... 10.5 percent) - is decreasing at a higher rate. The decline is slightly less in the jewellery manufacture and wholesale trade (by 7 percent), and the smallest reduction in the number of market participants is in the jewellery retail trade (by 5.7 percent).

At the same time, the number of participants in the jewellery repair market has grown over the same period very sharply, by 33.2 percent! This situation was also expected as people prefer to buy no new non-essential goods amid the uncertainty about their tomorrow’s well-being, and choose to repair the things they have, if necessary.

However, the observed dynamics of changes in the number of participants in the jewellery market over the past six months may have another explanation, especially taking into account a sharp increase in the number of players in the jewellery repair market. At least, an additional critical factor may start taking on greater importance. The fact is that in Federal Law No. 47-FZ dated March 9, 2022, in addition to VAT exemption for refined precious metal bars sold to individuals, there is a rule (widely discussed in the Russian jewellery community) relating to a ban on the use (from January 1, 2023) of a simplified tax system (STS) and a patent taxation system (PTS) for both jewellery manufacturers and traders.

The jewellery community was not troubled by the introduction of the State Integrated Information System in the Sphere of Control over the Circulation of Precious Metals and Precious Stones (SIIS PMPS) as much as by possible losing the right to use the STS and PTS!

Naturally, the small-scale jewellery businesses began to look for ways to legally restore the lost rights to apply special tax regimes. However, there were those market participants who lost hope for a change in the legislation and started looking for “loopholes” to retain the right to apply special tax regimes in the current conditions.

There are “loopholes”, but they are few. One of them is the transfer of the activities from the OKVED’s jewellery manufacture to the OKVED’s jewellery repair. Since Federal Law 47-FZ does not specify a ban on the use of special tax regimes for the jewellery repair, it is likely that they can still be used. This makes this type of jewellery business especially attractive (this could be the reason for the 33.2-percent growth in the number of players over six months).

Possible use of the special tax regimes for jewellery manufacture under the guise of jewellery repair looks rather a simple way because the current regulatory legal framework allows (at least for the time being) to carry out repairs using the materials (i.e., precious metals and precious stones) provided by a customer who ordered thee jewellery repairs. Moreover, the jewellery repair today is mostly regulated not by the Federal Assay Chamber, but by Federal Service for the Oversight of Consumer Protection and Welfare (the main regulatory act is Decree of the Government of the Russian Federation No. 1514 of September 21, 2020 “On Approval of the Rules for Consumer Services to the Population”. Although it is clear that the regulator can “correct the situation” at any moment by closing this window of opportunity to remain within the STS.   

Another possible “loophole” to keep working with jewellery and applying the special tax regimes can be the use of Article 145 of the Tax Code of the Russian Federation. If during a quarter (three months) the revenues from the sale of goods (works, services), excluding tax, do not exceed a total of 2 mn roubles, these entities are entitled to exemption from fulfilling the taxpayer obligations to pay the VAT, according to Article 145 of the Tax Code of the Russian Federation. It is still pending whether such an entity can apply the STS and the PTS, the Russian Ministry of Finance has not yet given clarifications on the issue. Although it is clear that 666,000 roubles a month is a too small sum of money for the jewellery trade to survive ... And an artificial fragmentation of the trading business to such figures ​​also drives up the unnecessary costs. So, this “loophole” is rather purely theoretical, even if it is allowed in this case to use the special tax regimes.

But all of the above is by no means a panacea for the risks of a necessary switch of a small jewellery business to a general taxation system. Only a new legislative adjustment to Federal Law 46-FZ (already adopted) can radically change the situation. It is obvious that such a correction is possible only through a new bill amending the Tax Code of the Russian Federation. There is a need for this adjustment, and, first of all, not even the jewellers’ community, but the state requires it: almost certainly, additional state revenues stated in the feasibility study for law 47-FZ (it was still a bill then) in the amount of up to 30 bn roubles obtained due to the measures taken to ban the use of the STS and PTS by jewellers will not be achieved. Highly likely, the closure of a significant part of small jewellery enterprises (presumably from 30 to 60 percent) should be expected due to an abrupt multiple increase in the tax burden as well as in the multiple increase in the administrative costs of small jewellery businesses, which will result in a decreased rather than an increased tax revenues from the jewellery industry to the state budget.

Is it possible to keep the right for the small jewellery business to apply the STS and at the same time, guarantee additional income from jewellers for the budget? It’s definitely possible. After all, the Russian Ministry of Finance fears that jewellers would use the special tax regimes after the abolition of VAT on bullions of refined precious metals for individuals, and there will be a risk that gold would flow without VAT from the ‘civil’ circulation (i.e., among the individuals) into the jewellery manufacture sector. But gold (and other precious metals) without VAT is already used in the jewellery manufacture sector. This is the metal bought from the population as scrap jewellery pieces. And according to Federal Law 47-FZ, scrap of precious metals bought from the population will still not be subject to VAT.

It would be logical to solve the problem on the legislative basis in a different way and not to deprive the small jewellery businesses of the right to apply special tax regimes in the jewellery sector, but to introduce VAT on all types of precious metals introduced into the manufacturing sector, including jewellery scrap bought from the population; this is what the jewellery community is offering to the Government of the Russian Federation today. However, there is practically no time left for the adoption of a new law introducing appropriate regulatory changes to law 47-FZ. And jewellers cannot hope for a moratorium on the norms or a postponed enforcement of the norms already adopted because the state is looking for additional budget revenues, and such revenues from the jewellery industry have already been promised. But will the revenues be obtained? There is a very great doubt about it...

Vladimir Zboykov for Rough&Polished