India’s gold trade may face a working capital problem

India’s gold trade may face a working capital problem following the imposition of 0.1 percent tax collected at source (TCS NSE -3.78 %) effective from October 1. Bullion traders and gold trade analysts fear that it could have a detrimental effect not only on the bullion dealers and jewellery firms, but also the 50 lakh artisans who are reeling from job losses due to the pandemic.

The imposition of TCS will block an average bullion dealer’s working capital of Rs 67.50 lakh per year on sale of Rs 1,000 crore for which refund is to be claimed with income tax department after submission of accounts.

Talking to ET, Surendra Mehta, national secretary, India Bullion & Jewellers Association (IBJA) said that it takes 18 months on an average to get the refund.

The bullion trade operates in the following manner. A bullion dealer enters into sale contract with a jewellery manufacturer for sale of say 1 kg gold. He immediately covers his position by entering into purchase contract with the nominated agency or a refiner.

The jewellery manufacturer transfers funds immediately. The bullion dealer’s bank account is credited instantly.

As soon as the funds come into bullion dealer’s bank account, goods are delivered to the buyer on the one hand and on the other, payment to the importer is sent through RTGS against purchase contract.

The entire process takes less than 30 minutes to complete.

Further, bullion is even purchased on commodity exchange platform wherein buyer and seller are not known to each other. Under this situation, it is almost impossible to collect TCS after execution of delivery and payment from the buyer by the seller.

The bullion dealer works with many buyers in a day with the same investment as it rotates multiple times during daily working hours. Considering a bullion dealer rotates his funds at least once a day and assuming there are 200 working days in a year, the bullion dealer achieves a rotation cycle of 200 in a year.

“It is simple arithmetic that 0.10% TCS for 200 times will siphon off a bullion dealer’s 20% liquid capital within one year whereas, our Income tax liability will be only 1.5% ,which is just a very small fraction of the accumulated TCS of 20%. This will be a huge impairment for any company. Moreover, this will continue for successive years before refunds start pouring in, which is possible only after filing of return and scrutiny assessment done. This may take up to three years. The effect of this will percolate down to the manufacturing industry as the raw-material supply will be badly affected,” said Mehta.

“This move was not at all required in B2B business. This will increase paper work and block capital. The margins of bullion dealers are very thin and this will create problem for them,” said Bhargav Vaidya, a gold trade analyst.

Courtesy: Economic Times