To Turnover or Not to Turnover

In its most basic form, the role of a government is to serve the needs of a country's population. It is responsible for providing infrastructures, an education system, health services and security to the people. To do so, it needs money. Money usually comes from the citizens of the country who provide funds to the government through taxes.

A good taxation structure is therefore necessary for a government to operate on behalf of the people.

At a time when Botswana, Namibia and others are investing in local diamond centers, the Indian government is taking the opposite route, and decreasing its collection of taxes from the diamond industry in the process.

Of course, reducing tax revenue is not its intention. It believes that the current policy of levying a 33 percent corporate tax on companies is the way to go.

The Indian government is suspicious of its diamond industry and tends not to believe that the industry is working with low margins – a point of contention. The top 100 Indian diamond exporters reported a typical margin of 1-5 percent. The government proposed a tax plan where it presumed a higher profit margin of about 8 percent. The industry rejected the offer.

India’s Gem & Jewellery Export Promotion Council (GJEPC) claims the real margins are typically as low as 1-2 percent, with many having a 0.5 percent margin. This explains the low tax collection.

A turnover tax – where companies pay regardless of their profits or losses, costs or margins – is necessary. A 1 percent turnover tax on polished diamond exports of more than $28.25 billion a year would result in a collection of $280 million annually, double the current estimated collection.

Not only will it collect more money, the government will also further discourage round-tripping (we have some anecdotal information that this has already started), improve distribution of financing, avoid the tricky estimation of the value of diamond stocks and decrease any urge to under report true business.

There is another expected benefit: Belgian and Israeli diamond firms will be encouraged to open branches in Mumbai. If the government also allows consignment, diamond miners will hold tenders in the country, further increasing the scope of business.

Here is the punch line: The proponent of the turnover tax is the diamond industry itself, which is making a forward-looking advancement and is willing to make the switch, even with the 2 percent import tax in place. The industry understands the benefits.

Commerce Minister Anand Sharma is endorsing the change. Now Finance Minister Pranab Mukherjee needs to give his blessings. By doing so he will bring these benefits to the diamond industry and better serve India at large.