The Goods and Services Tax (GST) regime will provide a fillip to organised jewellery retailers by weaning business away from the unorganised players, who currently account for three-fourths of the industry’s annual revenue estimated by CRISIL at about Rs 2.85 lakh crore.
Besides GST, other measures such as the ban on cash purchases of more than Rs 2 lakh per transaction, gold-on loan and gold deposit schemes are also beneficial for organised retailers.
GST compliance is an effort-intensive process and will be more cost effective for the organised retailers because of their large scale of operations. In addition, they operate largely from leased premises and under GST, they will benefit from set-off of tax paid on rent. Further, because of the cascading nature of the tax, the entire jewellery supply chain will come under the tax net, making it more traceable, which is advantageous to the organised retailers.
GST on gold jewellery has been set at 3%, a tad above the current tax rate of ~2%. Further, the tax on making charges has been set at 5% against nil tax earlier. The overall increase in end price of jewellery is expected to be about ~1%.
Says Amit Bhave, Director, CRISIL Ratings, “The modest increase in the overall tax rate is not expected to impact demand. Further, better supply-chain efficiencies and enhanced transparency will provide an edge to the organised players and help them garner a higher market share over the medium term.”
CRISIL rates 212 gold jewellery retailers of which 54 are in the investment grade. The implementation of GST along with the ban on cash purchases above Rs 2 lakh with effect from April 1, 2017, is likely to push more consumers to organised jewellery retailers, which would improve their business profiles. CRISIL believes that over the medium term, revenues of organized jewellery retailers would grow at 5-6%, almost double the overall industry growth of 3%.
Says Rishabh Jain, Associate Director, CRISIL Ratings, “Increasing share of sales under the gold deposit scheme, and higher utilisation of the cost-effective gold-on-loan scheme, are also enabling organised jewellers to control their interest costs, which is supporting their profitability and credit metrics. For instance, over the past three years, the ratio of total outside liabilities to tangible net worth for the top 6 CRISIL-rated players, accounting for almost 12% of industry revenues, has improved to 1.6 times as on March 31, 2017, from 1.8 times as on March 31, 2014.”
GST and recent regulatory changes will improve the credit profiles of organised gold jewellery retailers with a potential gain in operating margin by ~25 basis points. However, their ability to, quickly streamline operations under the new tax regime, scale up of business, and manage future regulatory actions, will be monitorable going forward.