Yes, undoubtedly... as the position right now is not conducive for small and medium manufacturing units to survive, given that bank financing and loans are hard to get and prices of rough don't allow making profits out of the manufacturing process.
Taking an overview of the rough supply situation in India, one can see that it is the SMEs that are hard hit at present, more so now with the rather disturbing on-going events of the PNB fraud cases. In India, the present situation is a chaotic time for the Indian diamond manufacturers, especially the SMEs who are caught between 'a rock and a hard place' - literally.
Admitted that the Indian gem and jewellery industry is currently burdened with a cartload of challenges to worry about, but here, let's take it one at a time. Being the world's largest cutting and polishing sector that employs hundreds of thousands of artisans and processes 14 out of 15 diamonds consumed globally, ensuring a continuous supply of rough could easily be considered the biggest concern.
Feeding the manufacturing units, small and big, has been the first and foremost concern for the Indian diamond industry over the years. The Gem and Jewellery Export Promotion Council of India (GJEPC) has been consistently striving to convince the Indian Government to introduce 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. Currently, rough diamonds are mainly imported into India from such trading centres as the European Union (mainly Belgium), Hong Kong, the United Arab Emirates, Israel and other countries, including Canada, the United States of America, Russian Federation, Switzerland, Singapore, Botswana, South Africa, Australia, etc.
On the topic of tax and customs system in India's diamond trade, as well as the reason why it has taken so much time to establish direct sales of rough from mining companies inside the country, Promod Agarwal, Chairman, GJEPC said: “The Indian diamond industry is the world leader in cutting and polishing diamonds. We have achieved this status without a single mine in India. We source rough diamonds from various trading centres like Belgium, Dubai, Israel, etc. In India currently with the setting up of India Diamond Trading Centre - SNZ - at Bharat Diamond Bourse, top mining companies have this opportunity to bring in their diamonds for viewings to buyers, but sales don’t take place in SNZ."
Agarwal also stressed that introduction of a presumptive taxation system would be a game changer for the industry as it will allow the sale of diamonds in India and it will give India a level playing field with other competitive markets. The Council has proposed the introduction of presumptive taxation to the Government of India. “Being the leader in cutting and polishing diamonds, such a policy is essential to take the industry to the next level,” he added.
In December 2015, an SNZ (Special Notified Zone) was also established at the Bharat Diamond Bourse, Mumbai, where import and trading of rough diamonds could be allowed, thus helping miners to bring their rough supplies directly for trading in India. But, till date, due to the complex tax system, there has been only 'viewing' facilities at the SNZ, but mining companies cannot come to India and auction their roughs without any tax liabilities.
The explanation given by Colin Shah, Vice Chairman, GJEPC, too, reflected the tax issues: "Under the Indian direct tax regime, any income arising from the sale of any asset/property or source of income situated in India is deemed to accrue or arise in India. Given this, the sale of rough diamonds from SNZ triggers a tax rate of 40% (plus surcharge and cess as applicable) vis-à-vis carat tax / presumptive rate ranging between 0.125% - 0.16% applicable to the sale of rough diamonds at Antwerp. This makes the direct sale from SNZ as non-competitive. So, obviously, it is more convenient to buy 'rough' from major diamond hubs, like Antwerp or Dubai due to the tax benefits."
Echoing similar sentiments, Vipul Shah, former chairman of GJEPC, too, pitched for a reasonable and presumptive tax structure for the diamond industry. He reiterated that 'the GJEPC has been representing the industry's woes to the government and hoped that necessary steps will be taken in the future. But he did not forget to warn that such changes from the government will take its own time. Shah also asserted: "Now, most mining companies are taking part in displaying their goods in the SNZ at BDB, Mumbai for the buyers' 'viewing', which has been helpful to the industry to an extent".
Dinesh Navadiya , Gujarat Regional Chairman, GJEPC, also had a very candid opinion on the same topic: "The miners from the other countries are facing many issues making direct sales to Indian polishers such as they have to send the rough diamonds as sales and not as a consignment for auction or display which is very inconvenient if the material is not needed or of the expected standard."
Most Indian diamantaires find it more convenient to buy rough from major diamond hubs like Antwerp or Dubai. Why? Navadiya answers: "The diamond hubs like Dubai and Antwerp having Government policies allowing consignment-based transaction which attracts mining companies and buyers both. They get business-friendly environment and presumptive tax structure to deal with the business freely. The business-friendly Government policies are very lenient, and miners are permitted to sell the goods directly and on the spot after the display of the goods."
In general, while the large manufacturers have the financial power to survive in tough times like high rough prices, shortages etc., it's the SME's who face the brunt. But then, the SMEs form a major part of the cutting and polishing sector and cannot be left to fend for themselves. Their role, as well as the market share of small-scale diamond manufacturers in India, compared with big manufacturing businesses is of utmost importance. Navadiya commented: "Small-scale Diamond manufacturers may roughly form about 40% of the total Diamond manufacturers in India. Though there is no proper data available for the same. The SMEs are playing a major role by providing employment, offering cutting and polishing work at a cheap rate. The SMEs in this sector having the skill to cut and polish small sized diamonds where the cost of the raw material is not high as compared to labour, but this is the factor that playing an important role making India a hub for diamond cutting and polishing."
For a country which processes almost 85% of the world's rough, India imports just around 15% of rough directly from the producing countries, while the balance is shipped in from the trading hubs. Therefore, it is imperative that the Indian government simplifying the tax structure thereby saving transaction cost, facilitate more FDI into the country, and help in the smooth trading of goods.
Dinesh Navadiya has for decades taken upon himself to protect the small manufacturers and look for avenues to support them for their rough diamond needs. He explains the role traders play accurately: "For Small unit holders it is not affordable to visit overseas diamond hub and participate in rough diamond auctions or direct purchase it from mining companies. SMEs rely on the Diamond traders who fill the gap and play a role of a bridge between Miners / big players and small manufacturers by procuring rough diamonds in bulk quantity from the supplier and providing the same to SMEs in the local market as per their requirements."
Almost 90-94% of the cut and polished diamonds that are manufactured in India are exported. The industry should, therefore, be declared as zero-rated indirect tax regime and make taxes paid only on invoices raised to Indian companies and not on re-exports of rough diamonds imported through Special Notified Zone (SNZ). The SNZ was supposedly established for import and trading of rough diamonds in India, and help mining companies bring their rough supplies directly for trading in India.
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, or UAE. But the complicated procedures and potential taxation disputes make large producers hesitant to set up operations in India.
Now the onus is on the Indian government to take the right steps to support the country's gem and jewellery industry, which is an example for 'Make in India' initiative and an employment creator. By making necessary changes to the current tax structure, the government's claim of helping in the 'ease of doing business' may actually get real.
Aruna Gaitonde, Editor in Chief of the Asian Bureau, Rough & Polished
