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Foreign buyers of gem and jewellery inspecting products on display at last year’s industry show FACETS 2023 – File photo
By Nisthar Cassim
The gem and jewellery industry yesterday warned that the Government’s decision to bring it under the Value Added Tax (VAT) regime from next year will force closure, the private sector relocating overseas or reverting to the informal sector.
Come 1st January 2024, import of precious stones, a key input for the industry’s exports as well as sale of gem and jewellery to tourists and expatriates, a major forex earner, will be subject to 18% VAT.
The Sri Lanka Gem and Jewellery Association (SLGJA) yesterday termed the move as “unprecedented” as the industry has always been GST/VAT exempted given the national importance in terms of earning much needed foreign exchange and employment.
Formal gem and jewellery exports amounts to around $ 500 million whilst domestic sale to tourists and expatriates is estimated at $ 1 billion. The livelihood of over 600,000 persons and their families is dependent on the industry as well.
Despite overall negative performance, Sri Lanka’s export of gems, diamonds and jewellery in the first 10 months of 2023 grew by 16% to $ 440 million. Total exports from Sri Lanka are down by 10%. Import of diamonds, precious stones and metals grew by 27% to $ 223 million.
In that context as well as at a time when consumer preference is shifting to colour precious gemstones from diamonds, the timing of bringing the gem and jewellery sector under VAT is ill-advised.
SLGJA members said that 70% of the exports rely on imported precious rough stones for multiple commercial reasons such as customer preferences and colour, design and product quality. This is applicable to both lapidaries as well as local gem-studded jewellery manufacturers.
“With 18% VAT the entire industry will become uncompetitive,” SLGJA members warned. They cited low VAT in competing sources such as India (3%), Thailand (7%) and Dubai (3-5%).
Other risks include industry which has world class technology and craftsmanship will relocate overseas especially to emerging gem and jewellery hubs such as Dubai and established hubs like Bangkok and Hong Kong. It was revealed that already several have set up shop overseas employing expatriate Sri Lankan labour.
An already challenging environment for the industry has seen hundreds of skilled labour seeking employment in the jewellery companies in the Middle East and Southeast Asia.
SLGJA members alleged that by imposing VAT, the Government has failed to understand how the gem and jewellery industry operates. For example rough stones for value added exports are imported on a No Foreign Exchange (NFE) basis but an insurance premia is applicable. From 1 January 18% VAT will pose financial difficulties and foreign companies finding Sri Lanka more cumbersome. Sri Lanka also runs the risk of loss of supply opportunities to source rough stones as well as Sri Lanka becoming a gemstone trading/sourcing hub for Indian and other traders/manufacturers.
SLGJA members who cater to tourists visiting Sri Lanka lamented that in principle, VAT is a consumption tax hence imposing it on the sale to foreigners was completely irrational. They also pointed out that lack of VAT refund scheme at the Sri Lankan ports was a further hindrance.
In that context it was warned that 18% VAT on the gem and jewellery industry will also have a serious impact on the tourism sector, which is the sole silver lining for Sri Lanka post-economic crisis. “The Government and tourism authorities have been promoting Sri Lanka as a land of precious stones for incoming tourists but with 18% VAT that attraction will be lost,” they pointed out. Sale of gem and jewellery to tourists is more lucrative than exports given the high margins.
Another important customer base for the industry is the Sri Lankan expatriates/diaspora who source gems and gem-studded jewellery during their visits to the motherland. Sri Lanka is preferred as a credible source given the craftsmanship, quality and affordability.
SLGJA members are also disappointed that imposition of 18% VAT comes despite the industry making alternative proposals in recognition of the need to boost tax revenue. Estimating that value addition is 20-30% among proposals suggested were a tax on the value added component of gem-studded jewellery. This apart from the recommendation to exclude rough stones import for processing and re-export.
“As an industry we welcome efforts to widen the tax base but this must be achieved without killing the industry,” emphasised the members of SLGJA.
They warned that if the Government doesn’t reconsider the imposition of 18% VAT or consider alternative proposals, the gem and jewellery industry would go down or see a shift to the informal market resulting in further loss in existing tax revenue by way of income tax. Incomes of companies in the industry are taxed at 30% and individuals and partners at 36%.
