Budget Boost for India's Diamonds
July 25, 24
It's been a good week for India's diamond industry, relatively speaking.
The global downturn hasn't suddenly come to an end. But the government announced a package of measures in Tuesday's Union Budget that will ease some of the pain for Surat, Mumbai and elsewhere.
And that could help India - already the biggest production hub by far - develop into a major trading hub as well, alongside Belgium and Dubai.
Finance Minister Nirmala Sitharaman outlined three moves that should have a positive impact on the country's diamond industry.
She said diamonds will be exempt from the online sales tax (equalization levy) introduced in 2020; that taxes on other raw materials (silver, gold and platinum) would be significantly reduced, and that safe harbor rules would be introduced, providing fixed and favorable tax rates for rough purchases in the country's SNZs (Special Notified Zones).
Broadly speaking these are the measures the industry wanted, and these are the measures they got. Perhaps it's not so surprising that a diamond company in Surat chose to engrave the face of re-elected prime minister Narendra Modi on an 8 carat lab grown.
India's diamond industry, accounting for over 90 per cent of all the world's cutting and polishing, has suffered disproportionately as the world's economy falters.
The Western world has outlawed a third of all global diamond supply because of Russia's war in Ukraine, China has yet to bounce back from Covid lockdowns, and almost a half of US brides are opting for lab grown rather than natural.
India's exports of polished diamonds suffered another hefty drop in June, down 26 per cent year-on-year to $1.02bn.
So how will the Budget help?
The industry opposed the equalization levy when it was introduced in the early months of Covid, and has battled ever since for an exemption.
The two per cent tax applies to all sales made by foreign e-commerce operators - including suppliers of rough and polished diamonds - to any resident or business in India.
Removing this additional burden gives the industry more of a competitive edge.
Sitharaman also announced a boost for the jewelry industry in general as she delivered her seventh budget.
Tax on gold imports will drop from 15 per cent to 6 per cent. Silver will drop from 10 per cent to 6 cent, and platinum will drop from 12.5 per cent to 6.4 per cent.
But the most significant strategic move is the introduction of safe harbor rules for diamond transactions, which will encourage miners to make direct sales on Indian soil.
Safe harbor rules define the circumstances under which tax authorities will accept the transfer prices declared by taxpayers without further scrutiny.
They were first introduced in 2009, covering a very specific group of industries - such as software development, generic pharmaceutical drugs and auto components.
They will now be expanded to include the sale of diamonds in India's Special Notified Zones (SNZs).
Suppliers have been able to host viewing sessions for rough diamonds since the first SNZs were created in 2015 - but buyers haven't been allowed to make direct purchases.
They've had to route their transactions through Dubai, Belgium or other international hubs.
This a potential game-changer for India and effectively levels the playing field. Indian diamond manufacturers will no longer have to travel abroad to source their rough. The suppliers will come to them, saving time, expense and inconvenience.
It won't ease the pain immediately, but in the long term it will help India reposition itself as a trader as well as a producer.
Have a fabulous weekend.