GJEPC Presentation- Analysis of GST ITC Accumulation issue of the diamond industry

INVERTED DUTY ISSUE- DIAMOND SECTOR

BACKGROUND Additional survey carried out post BITC meeting on 21st December 2021. The presentation summarizes findings of additional survey as also provides certain further clarifications, in light of discussions had in the said BITC meeting Issue prevalent since change in GST rate on cut and polished diamonds [‘CPD’] (to 0.25%) w.e.f. 25.01.18 •Rate on job work services reduced to 1.5% w.e.f. 30.09.19, but accumulation still subsists •Subsequent representations supported by survey of 28 entities, only collating accumulated ITC values During past meetings, authorities placing thrust on provision of audited data for evaluation, to determine- •Increase in GST rate on CPD to 1.5% whether addresses the issue? •Reduction in GST rate on grading and certification (‘G&C’) to 1.5% whether would cause accumulation qua agencies? Survey conducted for 9 registrations & simulation carried out, indicating- •50% of ITC pertaining to domestic transactions getting blocked •Reducing GST rate on G&C (to 1.5%) vs. increasing GST rate on CPD (to 1.5%) • Issue not addressed entirely vs. addressed entirely • Non-uniform impact vs. uniform impact • Past accumulation stagnant vs. usable • Grading- huge accumulation in the hands of agencies (80% of ITC)

ssue not addressed entirely vs. addressed entirely • Non-uniform impact vs. uniform impact • Past accumulation stagnant vs. usable • Grading- huge accumulation in the hands of agencies (80% of ITC)

ADDITIONAL SURVEY FINDINGS Unit scale (based on turnover) No of entities ITC- 31.12.20 ITC- 30.11.21 Average ITC per entity- 30.11.21 Average annual increase per entity Large (>100-mostly>500) 23 243.09 346.82 15.08 4.92 Medium (50-100) 30 65.40 84.77 2.83 0.70 Small (5-50) 10 2.46 4.21 0.42 0.19 Grand Total 63 310.95 435.80 NA NA Value of 12 entities forming part of last survey, not responded 16.12 22.59* Total ITC accumulation of only 75 entities 327.07 458.40 Annual increase [based on data of only 75 entities] 143.46* Note- 21 entities, out of top 50 diamantaires, have not responded All values in INR Cr. *Derived

WHETHER RATE INCREASE ON CPD TO 1.5% ENTAILS ANY REAL GST COST No real GST cost in hands of diamantaires GST on domestic supplies fully recoverable from buyer/ customer and full ITC admissible on inward procurements ITC attributable to exports fully admissible as refund and only additional cost would be cost of financing additional working capital 100% domestic 80% domestic Sr no.

ble on inward procurements ITC attributable to exports fully admissible as refund and only additional cost would be cost of financing additional working capital 100% domestic 80% domestic Sr no. Particulars Value Tax rate Tax Tax rate Tax 1 Import of rough 1000 0.25% 2.50

0.25% 2.50

Total 1000 2.50

2.50

2 Job work 250.0 1.5% 3.75

1.5% 3.75

3 Grading & others 50.0 18% 9.00

18% 9.00

Total 300.0 12.75

12.75

Total 1300.0 15.25

15.25

4 Local polished sale-20% 286

0.25% 0.72

1.50% 4.29

5 Exports-80% 1,144

0.00%

0.00%

Total 1,430

0.72

4.29

6 GST paid through current ITC 0.72

3.05

7 GST paid through past ITC

1.24

8 GST refund- Export 12.20

12.20

9 GST cost 2.34

2.34

0.72

4.29

77% 0.82% 0% GST proposed Cost for diamantaire Output tax for Govt Cost as % domestic ITC Cost as % domestic supply Transaction level details GST as is structure

0.72

4.29

77% 0.82% 0% GST proposed Cost for diamantaire Output tax for Govt Cost as % domestic ITC Cost as % domestic supply Transaction level details GST as is structure

FINANCE COST (INCREASED RATE) VS. REAL GST COST (AT CURRENT RATE) Entire value of exports has been considered for determining additional cost of funding under the proposed regime, which may also include exports of manufacturer- exporters, who may ideally not face any impact of additional incremental GST, as they manufacture CPD in-house USD (bn) INR Cr. 24

1,80,000

1,76,400

2,205

367.50

29.40

143.46 458.40 Past accumulation to becomse usable, based on data of only 75 entities Differential GST @1.25% (refundable in hands of exporter) Annual increase in accumulation as per current structure- based on data of only 75 entities Particulars GST per cycle (Average 2 months - considering holding period, credit period and refund period) Annual pre- tax- cost of funding @ 8% CPD exports for FY 22 for the entire industry Penultimate price (considering 2% margin)

OTHER RELEVANT CONSIDERATIONS Refund of ITC accumulated not a possibility Government would be averse to GST rate reduction on grading and certification (which does not also fully resolve the issue) While imports of CPD not significant, GJEPC may seek application of IGST @ 0.25% thereon Recommend GST rate increase on cut and polished diamonds to 1.5%?

THANK YOU

also fully resolve the issue) While imports of CPD not significant, GJEPC may seek application of IGST @ 0.25% thereon Recommend GST rate increase on cut and polished diamonds to 1.5%?

THANK YOU

AS IS SCENARIO QUA DIAMANTAIRES- FY 21
Particulars Value GST rate GST value Composition

1. Inward supplies A. Procurement of diamonds (including from distinct persons) 1,23,75,40,33,247

31,14,81,979

92.54% B. Procurement of other inputs/ input services 9,95,23,18,780

53,06,14,273

7.44% Job work services 7,62,35,36,983

1.5% 11,36,40,840

76.60% Grading and certification services 1,77,32,25,509

18% 31,91,42,119

17.82% D. Total ITC availed (A+B+C) 1,33,73,07,47,902

Various 84,66,00,691

100.00% 2. Outward supplies C. Total outward supplies [A+B] 1,47,31,45,79,337

15,69,47,260

3. GST payment, refunds and ITC accumulation 2A. Utilization of input tax credit 15,69,47,260

4. Refund of ITC on account of zero-rated supplies 53,95,58,831

Export refund proportion 63.73% 4. ITC accumulated for the period 15,00,94,600

4B. Percentage of accumulation vis-à-vis domestic stream 48.88% 4C. Total ITC accumulation as at the end of the period 80,74,98,521

Out of total ITC of INR 84.66 crores, around 36% pertains to domestic transactions (INR 30.70 Cr). Out of the same, around 50% is getting accumulated

at the end of the period 80,74,98,521

Out of total ITC of INR 84.66 crores, around 36% pertains to domestic transactions (INR 30.70 Cr). Out of the same, around 50% is getting accumulated

SIMULATION- GRADING & CERTIFICATION 1.5% Particulars Value GST rate GST value Composition

1. Inward supplies A. Procurement of diamonds (including from distinct persons) 1,23,75,40,33,247

31,14,81,979

92.54% B. Procurement of other inputs/ input services 9,95,23,18,780

23,80,70,537

7.44% Grading and certification services 1,77,32,25,509

1.5% 2,65,98,383

17.82% D. Total ITC availed (A+B+C) 1,33,73,07,47,902

Various 55,40,56,955

100.00% 2. Outward supplies C. Total outward supplies [A+B] 1,47,31,45,79,337

15,69,47,260

3. GST payment, refunds and ITC accumulation 2A. Utilization of current period input tax credit 15,69,47,260

2B. Through past period ITC accumulation

3. Refund of ITC on account of zero-rated supplies 35,31,00,497

Export refund proportion 63.73% 4. ITC accumulated for the period 4,40,09,197

Consolidated sheet-FY 2020-21

3. Refund of ITC on account of zero-rated supplies 35,31,00,497

Export refund proportion 63.73% 4. ITC accumulated for the period 4,40,09,197

Consolidated sheet-FY 2020-21

SIMULATION- CUT AND POLISHED AT 1.5% Particulars Value GST rate GST value Composition

1. Inward supplies A. Procurement of diamonds (including from distinct persons) 1,23,75,40,33,247

80,24,40,663

92.54% B. Procurement of other inputs/ input services 9,95,23,18,780

53,06,14,273

7.44% D. Total ITC availed (A+B+C) 1,33,73,07,47,902

Various 1,33,75,59,374

100.00% 2. Outward supplies C. Total outward supplies [A+B] 1,47,31,45,79,337

62,94,41,073

2. Total GST payment

62,94,41,073

2A. Utilization of current period input tax credit 48,51,32,785

2B. Through past period ITC accumulation 14,43,08,288

3. Refund of ITC on account of zero-rated supplies 85,24,26,589

Utilization of current period input tax credit 48,51,32,785

2B. Through past period ITC accumulation 14,43,08,288

3. Refund of ITC on account of zero-rated supplies 85,24,26,589

AS IS SCENARIO QUA DIAMANTAIRES- FY 21
Particulars Value GST rate GST value Composition

1. Inward supplies A. Procurement of diamonds (including from distinct persons) 1,23,75,40,33,247

31,14,81,979

92.54% Import of rough diamonds 74,48,85,57,198

0.25% 18,74,07,708

Domestic procurement of rough diamonds 9,91,59,35,089

0.25% 2,47,89,841

Import and cut and polished diamonds 14,61,88,835

0.25%/others 12,76,032

Domestic procurement of cut and polished diamonds 39,20,33,52,125

0.25% 9,80,08,400

B. Procurement of other inputs/ input services 9,95,23,18,780

53,06,14,273

7.44% Job work services 7,62,35,36,983

1.5% 11,36,40,840

76.60% Grading and certification services 1,77,32,25,509

18% 31,91,42,119

17.82% Bank charges 20,77,08,370

18% 3,73,86,883

2.09% Others 34,78,47,919

Various 6,04,44,432

3.50% C. Capital goods 2,43,95,875

45,04,439

0.02% D. Total ITC availed (A+B+C) 1,33,73,07,47,902

Various 84,66,00,691

100.00% 2. Outward supplies A. Supply of diamonds (including to distinct persons) 1,47,17,27,04,032

14,58,82,890

1. Domestic supplies 1A.

,902

Various 84,66,00,691

100.00% 2. Outward supplies A. Supply of diamonds (including to distinct persons) 1,47,17,27,04,032

14,58,82,890

1. Domestic supplies 1A. Supply of rough diamonds 20,54,05,18,361

0.25% 5,13,83,301

1B. Supply of cut and polished diamonds 37,79,95,60,105

0.25% 9,44,99,589

2. Zero-rated supplies (including to SEZs)

2A. Supply of rough diamonds 2,36,24,53,986

2B. Supply of cut and polished diamonds 86,47,01,71,579

B. Other supplies 14,18,75,305

Various 1,10,64,370

C. Total outward supplies [A+B] 1,47,31,45,79,337

15,69,47,260

3. GST payment, refunds and ITC accumulation
4. Total GST payment

16,36,56,762

2A. Utilization of input tax credit 15,69,47,260

2B. Cash payment 67,09,502

3. Refund of ITC on account of zero-rated supplies 53,95,58,831

Export refund proportion 63.73% 4. ITC accumulated for the period 15,00,94,600

4A. Percentage of accumulation vis-à-vis total ITC availed 17.73% 4B. Percentage of accumulation vis-à-vis domestic stream 48.88% 4C. Total ITC accumulation as at the end of the period 80,74,98,521

Consolidated sheet-FY 2020-21 (amount in INR)

ed 17.73% 4B. Percentage of accumulation vis-à-vis domestic stream 48.88% 4C. Total ITC accumulation as at the end of the period 80,74,98,521

Consolidated sheet-FY 2020-21 (amount in INR)

SIMULATION- CUT AND POLISHED AT 1.5% Particulars Value GST rate GST value Composition

1. Inward supplies A. Procurement of diamonds (including from distinct persons) 1,23,75,40,33,247

80,24,40,663

92.54% Import of rough diamonds 74,48,85,57,198

0.25% 18,74,07,708

Domestic procurement of rough diamonds 9,91,59,35,089

0.25% 2,47,89,841

Import and cut and polished diamonds 14,61,88,835

1.50% 21,92,833

Domestic procurement of cut and polished diamonds 39,20,33,52,125

1.50% 58,80,50,282

B. Procurement of other inputs/ input services 9,95,23,18,780

53,06,14,273

7.44% C. Capital goods 2,43,95,875

45,04,439

0.02% D. Total ITC availed (A+B+C) 1,33,73,07,47,902

Various 1,33,75,59,374

100.00% 2. Outward supplies A. Supply of diamonds (including to distinct persons) 1,47,17,27,04,032

61,83,76,703

1A. Supply of rough diamonds 20,54,05,18,361

0.25% 5,13,83,301

1B. Supply of cut and polished diamonds 37,79,95,60,105

1.50% 56,69,93,402

2. Zero-rated supplies (including to SEZs)

2A. Supply of rough diamonds 2,36,24,53,986

2B.

,93,402

2. Zero-rated supplies (including to SEZs)

2A. Supply of rough diamonds 2,36,24,53,986

2B. Supply of cut and polished diamonds 86,47,01,71,579

B. Other supplies 14,18,75,305

Various 1,10,64,370

3. GST payment, refunds and ITC accumulation
4. Output GST liability 1,47,31,45,79,337

62,94,41,073

1A. Domestic supplies 58,48,19,53,772

62,94,41,073

1B. Zero-rated supplies 88,83,26,25,565

2. Total GST payment

62,94,41,073

2A. Utilization of current period input tax credit 48,51,32,785

2B. Through past period ITC accumulation 14,43,08,288

3. Refund of ITC on account of zero-rated supplies 85,24,26,589

Export refund proportion 63.73% 4. ITC accumulated for the period

Consolidated sheet-FY 2020-21

3. Refund of ITC on account of zero-rated supplies 85,24,26,589

Export refund proportion 63.73% 4. ITC accumulated for the period

Consolidated sheet-FY 2020-21

SIMULATION- GRADING & CERTIFICATION 1.5% Particulars Value (INR) GST rate GST value (INR) A. Procurement of inputs (including from distinct persons) 73,10,31,464

8,61,10,786

B. Procurement of input services 5,30,91,33,321

71,40,93,295

C. Capital goods 6,25,39,553

64,43,487

D. Total ITC availed (A+B+C) 80,66,47,568

Outward supplies 71,06,81,834

Grading certification and other services 9,60,85,98,055

1.50% 14,41,28,971

Liability on inward supplies - RCM Inward Supplies 2,59,84,986

5.00% 12,99,249

Inward Supplies 4,00,53,35,528

12.00% 48,06,40,263

Inward Supplies 46,91,79,147

18.00% 8,44,52,246

2. Total GST payment

71,06,81,834

1A. Utilization of input tax credit 14,42,90,075

1B. RCM in cash 56,63,91,759

4. Input tax credit balance as of the end of the period 66,23,57,493

4A. Percentage of ITC accumulation 82.11% 3. GST payment, refunds and ITC balance related details 2. Outward supplies GIA India Laboratory Private Limited 27AACCG9457G1ZB

1. Inward supplies

4A. Percentage of ITC accumulation 82.11% 3. GST payment, refunds and ITC balance related details 2. Outward supplies GIA India Laboratory Private Limited 27AACCG9457G1ZB

1. Inward supplies

WHETHER RATE INCREASE ENTAILS ANY REAL GST COST Sr no. Particulars Value Tax rate Tax Tax rate Tax 1 Import of rough 1000 0.25% 2.50

0.25% 2.50

Total 1000 2.50

2.50

2 Job work 250.0 1.5% 3.75

1.5% 3.75

3 Grading & others 50.0 18% 9.00

18% 9.00

Total 300.0 12.75

12.75

Total 1300.0 15.25

15.25

4 Local polished sale-100% 1,430

0.25% 3.58

1.50% 21.45

5 Exports-0%

0.00%

0.00%

Total 1,430

3.58

21.45

6 VAT/GST paid (credit+cash) 3.58

21.45

7 VAT/GST refund- Export

8 GST cost 11.68

11.68

3.58

21.45

77% 0.82% 0% Cost as % domestic ITC Cost as % domestic supply Transaction level details GST as is structure GST proposed Cost for diamantaire Output tax for Govt

3.58

21.45

77% 0.82% 0% Cost as % domestic ITC Cost as % domestic supply Transaction level details GST as is structure GST proposed Cost for diamantaire Output tax for Govt

WHETHER RATE INCREASE ENTAILS ANY REAL GST COST Sr no. Particulars Value Tax rate Tax Tax rate Tax 1 Import of rough 1000 0.25% 2.50

0.25% 2.50

Total 1000 2.50

2.50

2 Job work 250.0 1.5% 3.75

1.5% 3.75

3 Grading & others 50.0 18% 9.00

18% 9.00

Total 300.0 12.75

12.75

Total 1300.0 15.25

15.25

4 Local polished sale-80% 1,144

0.25% 2.86

1.50% 17.16

5 Exports-20% 286

0.00%

0.00%

Total 1,430

2.86

17.16

6 VAT/GST paid (credit+cash) 2.86

17.16

7 VAT/GST refund- Export 3.05

3.05

8 GST cost 9.34

9.34

2.86

17.16

77% 0.82% 0% GST proposed Cost for diamantaire Output tax for Govt Cost as % domestic ITC Cost as % domestic supply Transaction level details GST as is structure

2.86

17.16

77% 0.82% 0% GST proposed Cost for diamantaire Output tax for Govt Cost as % domestic ITC Cost as % domestic supply Transaction level details GST as is structure

SIMPLISTIC ILLUSTRATION Sr no. Particulars Value Tax rate Tax 1 Import of rough 1000 0.25% 2.50

Total 1000 2.50

2 Job work 250.0 1.5% 3.75

3 Grading & others (bank charges etc. ) 50.0 18% 9.00

Total 300.0 12.75

Total 1300.0 15.25

4 Local polished sale 1,430

0.25% 3.58

Total 1,430

3.58

5 GST paid (credit) 3.58

6 GST cost 11.68

11.68

3.58

77% 0.82% Cost for diamantaire Output tax for Govt Cost as % domestic ITC Cost as % domestic supply Transaction level details GST as is structure