India has increased the rate of goods and services tax (GST) on polished diamonds — a move that, perhaps surprisingly, has received a positive welcome from the industry.

The levy for the category has risen to 1.5% from 0.25%, the country’s Gem & Jewellery Export Promotion Council (GJEPC) reported last week. This is of benefit to the trade, the organization explained, as it will help companies claim back dues and reduce their overall tax bills.

The GJEPC had been calling for the government to “rationalize” GST rates because of problems related to input tax credit (ITC).

Companies incur GST when they make “input” purchases for the purpose of expanding their businesses, such as “job work” — outsourcing manufacturing tasks — and grading services. GST rates on these are 1.5% and 18%, respectively. They accumulate ITC in their accounts with the government when they incur these taxes. However, they can reduce this by making sales and charging GST to their customers, which they deduct from their tax liability.

However, the 0.25% GST on polished-diamond sales was so low that it was incapable of making any significant reductions to the ITC manufacturers had accumulated. The higher rate will, in fact, make it easier for companies to slash their bills, the GJEPC explained. The diamond industry has amassed more than INR 6 billion ($76 million) in ITC combined, representing money that is locked up and unusable for the trade.

“The increase in [the] GST rate on cut and polished diamonds will not only stop further accumulation of ITC, but [will] help [with the] release of blocked working capital and stimulate industry growth,” said GJEPC chairman Colin Shah.

Image: A polished diamond in tweezers. (Shutterstock)