Ignoring our gold(en) egg

Disconnect among policymakers of various organs of government is a luxury that our crumbling economy and dwindling foreign exchange reserves can no longer afford. Those at the helm of affairs are facing an unparalleled situation. The country recently finalized a deal with the IMF in March for the release of $1.1 billion as part of the $3 billion bailout package.

There are many sectors and industries that have export potential far beyond this fun-size bailout package. The gem and jewellery sector in Pakistan is a sleeping giant – a cash cow and a gravity train with immense potential to contribute significantly to the national economy. By addressing existing challenges through policy reforms and international collaborations, Pakistan can transform this sector into a major export-oriented industry like Thailand and India did, now enjoying annual exports of $14 billion and $40 billion respectively.

Unfortunately, there is a great deal of trust deficit between policymakers and those who are leading the sector. The procedural gaps and disconnect among policies collectively tantamount to failure in achieving the true financial benefits of this sector. The sector’s trade volume and tax collection is dismally low. A well-articulated policy is required to achieve the goal.

The already trembling export of the jewellery sector received a real blow in the second month of this year when HS code 9929, which deals with the temporary import of gold for the purpose of export, was removed from the customs tariff rendering WeBOC ineffective for filing goods declaration for the export of gold jewellery under SRO760.

The official stance is that there is no mention of the zero-rated export of gold jewellery under the Sales Tax Act, 2012. The same facility is available to other sectors where temporary imports are solely meant for exports after value addition. The same is the case with the export of gold jewellery under the entrustment scheme as allowed in SRO760. It is a cut-off between SRO760 and the Sales Tax Act, 2012.

Not only are gold jewellery exporters suffering from the situation, but the government is also unable to tap into the sector’s potential. Both are losing a whopping 13 per cent profit on value addition of the precious metal in the form of much-needed foreign exchange. Similarly, the commercial import of gold is allowed and governed by Part II of Annexure B of the Import Policy Order, 2016, but the State Bank of Pakistan regulates the import of gold as empowered under Section 8 of the Foreign Exchange Regulation Act, 1947. Nobody can import gold in Pakistan without special permission from the SBP, which prohibits the use of foreign exchange for the import of luxury goods like gold and other precious metals.

The ballpark figure for the current potential of the sector would be about $5 billion annually without using a single dollar from the country’s foreign exchange reserves. Gemstones are perhaps indigenous in nature, while gold is received against advance payments under the entrustment scheme with a room for 2-10 percent of wastage charged during jewellery manufacturing and 8-13 per cent value addition which is remitted as foreign exchange to the national exchequer.

Exporters in Pakistan are mainly focusing on the UK and the Middle East and that too on the Pakistani diaspora, rendering us a miniscule share from the annual $500 billion global gemstones and jewellery market. The present business model heavily relies on B2B and value addition is the only source of revenue.

The real magic will come into play when we zero in on the retail market of jewellery, studded with real natural precious gemstones. The general rule of thumb governing value addition of gemstones causes an increase of three times in the price when gemstone is faceted from its rough. Another three times surge occurs when those loose stones are mounted on fine jewellery. This depicts the value addition of the retail market and the role of the B2C marketplace for earning foreign exchange for the country.

An online payment system and a courier service which can carry valuables is a need not to be missed. This will not only help small players to contribute to the economy but also lend a hand to break the elite capture in the sector. The self-consignment scheme with some modifications turns out to be a great help for those who want to sell fine jewellery in the retail market. The ease of doing business and fair accountability on the part of government departments and the sector itself is the only recipe for success.

There are tricks in every trade which need to be honed in. The immediate one is to align customs tariff, the Sales Tax Act, and SRO760 for a convenient resumption of trade. A modification of Clause 5(iii) for the realization of cash from 120 days to 180 days will greatly help retailers to successfully complete transactions in B2C.

Clause 8 also demands reconceptualization where a mechanism should be devised to bring back unsold gems and jewellery to international trade shows and fairs. Some schemes may be introduced where incidences of tax to a certain mutually accepted limit make it convenient to use domestic gold for self-consignment purpose.

Due diligence on the product mix is required. Gemstone-studded jewellery instead of plain one can fetch far more prices and require far less use of gold. The alternative use of titanium instead of gold is a doable option keeping in view the success story of Wallace Chan, a Hong Kong-based jewellery artist.

Bringing venture capital to the industry has also turned out to be a game changer; Kalyan Jewellers in India fetched $235 million as a venture capital to enhance the scale of its operations. Bringing more jewellers into the tax net can fetch a sizeable tax against the present insignificant collection. Till then the status of withholding agent may be relaxed as late as 50 per cent of the sector comes into the tax net.

The writer is a gemologist and jewellery enthusiast.