The government on Tuesday, May 31, 2016 rolled back its budget 2016-17 proposal to mandate on jewelers and goldsmiths a responsibility to collect tax at source at the rate of 1% if the purchase was for more than Rs 1 lakh and the payment was done through cash.  From June 1, 2016 the TCS of 1% will apply only on cash purchases of jewels and gold in excess of the Rs 5 lac threshold.  The gold ornaments and accessories companies’ shares such as Titan’s naturally surged more out of sentiment than out of realization of the reality.

Representational image. Reuters

Representational image. Reuters

The gold trade was upset with the proposal to impose 1% excise duty on jewelry manufacture made in the budget 2016-17 and went on a prolonged and suicidal strike before it was called off in the middle of April 2016.  This hasn’t been rolled back. What has been rolled back is the TCS threshold which is the smaller cutoff point for which—Rs 2 lakh—at best got a muted protest.

TCS is not a bad idea on expensive cars, forest produce, etc., traditionally considered to be hard-to-tax categories.  The buyer has to pay the seller in addition to the selling price, the prescribed rate of ad hoc tax as well so as to bring him into the tax information system.  Armed with the information about him, the income tax department would gun after him to collect his actual tax liability after adjusting the ad hoc tax collected in advance.

Gold and jewelry are a different kettle of fish.  They are amenable to fragmentation or splitting at the point of purchase.  An Rs 10 lakh car cannot be purchased from two dealers or from the same dealer at different points of time.  But gold and jewelry can be unless an item of jewelry happens to be pricey and would cost the buyer upwards of the cut off point for TCS i.e. Rs 5 lakh.

To wit, if one wants to buy jewelry for Rs 10 lakh in cash, he can choose two auspicious days for this purpose, and on each day he would stop short of breaching the Rubicon—Rs 5 lakh.  And if he is not finicky about the jeweler, he doesn’t even have to look for two auspicious days—he just has to visit two shops, often adjacent to each other, as in Chennai’s famous North Usman Road which is choc-a-block with jewelers, one after another.

A single piece of jewelry costing more than Rs 5 lakh would be a rarity and an exceptional purchase.  At best, this alone would come under the TCS pincer. By and large gold and jewelry are amenable to fragmentation at the point of purchase.

Expensive single piece jewelry priced in excess of Rs 5 lakh are of course sold, but the buyer and seller can easily wriggle out of the TCS pincer by fragmenting this transaction if not the product on paper and showing them as two purchases spread over two days each below Rs 5 lakh.  After all this is the land where huge plant and machinery costing upwards of Rs 20 crore has been split into bills of Rs 5,000 each or less with an eye on 100% depreciation, prompting the then Finance Minister Manmohan Singh to scrap the 100% depreciation on small items of plant and machinery i.e. items costing not more than Rs 5000.  Manmohan Singh regaled Parliament with the story of a wily buyer of machinery who produced thousand of bills from the same supplier each for less than Rs 5,000 and calling each a component of a plant!

The government even otherwise is barking up the wrong tree.  Black money is often invested in bullion rather than in jewelry, and bullion lends itself even more easily to fragmented purchases and holdings.  What the government ought to do is to bar goldsmiths and jewelers from selling bullion at the pain of heavy and stiff penalty.  Gold coins and biscuits must be sold only through providers of financial services like banks.  And banks must be told not to take cash as payment.

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Why TCS on gold purchases worth Rs 2 lakh or Rs 5 lakh is a hare-brained idea