The commerce ministry is pitching for a reasonable and presumptive tax structure for the diamond industry — roughly similar to the one in Belgium — in the special notified zone (SNZ) to help India emerge as a global trading hub in the precious stones, reports Banikinkar Pattanayak in New Delhi.

Though the revenue department will have the final say on the tax rate, the commerce ministry will likely favour a presumptive tax on turnover of 2-3%. Such a move, the ministry feels, is vital to provide a leg-up to the country’s first SNZ for diamond in Mumbai.

The zone hasn’t witnessed any trading activity since its inauguration in December last year due to a “convoluted” tax structure, a senior official told FE. This could be part of the commerce ministry’s pre-Budget recommendations, to be submitted to the finance ministry.

Currently, as per the benign assessment procedure (BAP) introduced in 2007-08, net profit for the diamond business is presumed at 6 % for the purpose of computing corporate income tax. However, the industry’s contention is that 6% is too high, as the usual profit margin in the business is only 1-3%. By contrast, the effective presumptive tax for the diamond industry in Belgium stands at a meagre 0.06-0.09% of turnover, while that in Israel is in the range of 0.29% to 0.33%.

Even a task group under former director general of foreign trade Anup Pujari had conceded that only 2% of the industry players might be able to meet the threshold of 6%. This is because actual net profit in diamond manufacturing is in the range of 1.5-4.5% and in diamond trading in the range of 1-3%, the task group had said in a report in 2013.

Also, there can be huge differences in yields and in the gross margins of various companies, as the processes and the yield vary, depending on the rough diamonds procured.

Such high tax, along with a plethora of documents required to be submitted for complying with the tax structure, have encouraged domestic companies to import rough diamonds from places like Antwerp or Dubai and export them after polishing.

India had set up the special notified zone in Mumbai for diamond to remove middlemen and encourage overseas diamond mining companies to open their offices at designated places to sell rough diamonds directly to Indian manufacturers. This was also to help relatively smaller players to cut down on costs on foreign travels and setting up offices in places like Antwerp or even Dubai to source diamonds.

The success of the SNZ is important as although over 90% of the world’s rough diamonds are polished in India, domestic manufacturers still have to source the commodity from Belgium due to a benign tax regime there.

Sources:.financialexpress.com