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India to take the ‘rough’ road for further growth

17 november 2014

On the Indian diamond Industry’s persistent request, the Government of India is planning to set up a special zone with tax benefits for diamond import and a trading hub. A possible road map is being chalked out by the Government but whether Mumbai is being touted as the chosen city for the Hub, Vipul Shah, Chairman of the Gem & Jewellery Export Promotion Council of India (GJEPC) said that the venue has not been finalised and that GJEPC has not received any intimation fr om the government.

Recently, a GJEPC delegation recommended the introduction of a turnover-based taxation system as it would help in attracting foreign diamond mining companies to trade rough diamonds in India and make it a diamond-trading hub. The delegation also requested the government to declare designated areas in the diamond bourses as ‘special notified zones’ wh ere import and trading of rough diamonds will be allowed, thus helping miners to bring their rough supplies directly for trading in India.

For the past many years, the Indian diamond industry has been eager that a Special Zone be established for convenient trading of rough from producing countries.  Due to the complex tax system, many trading centres were shying away from coming to India for diamond trading. Whereas, by establishing a Special Zone, mining companies can come to India and auction their roughs without any problems. Transaction cost will be saved, FDI will come into the country and on the whole smooth trading of goods can take place. According to GJEPC estimate, 85% of the global cutting work, in volume terms, takes place in India. However, just around 15% of rough is imported directly from the producing countries, while the balance is shipped in from the trading hubs.

India does not produce rough diamonds and almost 90-94% of the cut and polished diamonds that are manufactured in India are exported. The industry feels that any indirect taxation on the sector will only result to export of taxes. In addition, the industry thinks that it should be declared as zero-rated indirect tax regime. And also, all duties collected in way of VAT or Goods and Service Tax (GST) should be refunded by way of drawback at the rates computed by way of survey of actual exports. The best thing that could be done for the diamond industry is to establish a Special Notified Zone (SNZ) for import of rough diamonds and make taxes paid only on invoices raised to Indian companies and not on re-exports.

The global diamond producers are aware that the large market for their rough diamonds in India means that they can make a couple of percent more by selling directly in India instead of the traditional trading centres of Belgium, Israel or UAE. But the complicated procedures and potential taxation disputes make large producers hesitant to set up operations in India. Therefore, creating a notified zone for import and trading of rough diamonds in India will help companies bring their rough supplies directly for trading in India.

It is suggested that, initially, it could be opened to large, established and reputed mining companies, which are already notified by RBI for advance remittance (RBI A.P. (DIR Series) Circular No. 21 dated December 29, 2009), their respective offices can be demarcated as the notified zone under customs bond. For others, an area managed by BDB and operated by GJEPC can be used as a common notified zone under customs bond.

The negative effect of fragmentation of rough supplies is that suppliers would want to maximize the revenues for their rough at the cost of their customers. So, not surprising that large producers like ALROSA and De Beers, who have long term supply contracts raise prices quickly, and maintain high rough prices when polished prices fall. So, long-term-contract customers continue to pay the high prices and bear losses to ensure that their supply contract continues.

The current scenario of rough imports is rather encouraging, despite a section claiming that rough prices have been going north, while polished prices remain stagnant. According to GJEPC’s recent figures, exports of rough diamonds recorded US$ 151.06 million (3,487,000 carats) for Sept.’14 as against US$ 123.66 million (2,623,000 carats) in Sept.’13, registering an increase of 22.16 percent. However, there is a decrease in exports of rough to US$ 767.09 million for Apr.14- Sept.’14 from US$ 809.84 million for the period Apr.’13 - Sept.’13, registering a decline of 5.28 percent.

Imports of rough diamonds have risen to US$ 9,388.89 million (7,4475,000 carats) for the period Apr.’14 – Sept.’14 from US$ 8,589.42 million (81,477,000 carats) in Apr.’13 - Sept.’13, registering a 9.31 percent rise, while carat wise it shows a decrease by 8.59 percent. For the month of Sept.’14, rough import shows a rise recording US$ 1,491 million (12,963,000 carats) compared to US$ 1,282.53 million (12,044,000 carats) for Sept.’13, showing an increase of 15.55 percent.

Studies show that the value addition of the diamond polishing sector has reduced to 15-20% from the 20-25% which it commanded over a decade ago. Over the last decade, the cost of value addition from polishing has remained nearly static, while the rough and polished prices have been volatile. But rough imports into the country have risen consistently (ref. GJEPC’s chart) over the last decade, except during 2008-10 crisis, when the Indian industry was affected by the global downturn.

Aruna Gaitonde, Rough&Polished, India