Jewellers urge GST review on local gold bars

The majority of gold bars sold in Malaysia today are locally fabricated and subject to the 6% goods and services tax (GST), something which the Federation of Goldsmiths and Jewellers Associations of Malaysia (FGJAM) is appealing to the government to change.

Currently, only precious metals, including gold bars, that are certified by the London Bullion Market Association (LBMA) are exempt from the consumption tax. LBMA comprises representatives from bullion banks, refiners and related parties from around the world and a certification from them is akin to having a stamp of quality for any precious metal.

“But we have locally fabricated gold bars all this while. The majority [of gold bars] sold in the market here are locally fabricated, so we have to charge GST. You’re killing this segment,” FGJAM president Ermin Siow Der Ming contended during a telephone interview with The Edge Financial Daily.

The situation is also affecting jewellery exporters, as customers pay them in gold bars which do not always carry the LBMA certification.

“So they have to pay the 6% rate on the gold bars to the customs. It’s a lot of money,” said Siow.

“Even though they can claim back [the tax] because they will export the gold again anyway [in the form of finished jewellery], a lot of money is tied up and is a burden to their cash flow,” he said, adding that about 50 tonnes of gold worth RM8 billion were exported last year.

However, he noted that the government has come up with the Approved Jeweller Scheme (AJS) to ease goldsmiths and jewellers cash flow problem, whereby the GST on non-LBMA certified gold bars has been “suspended” for now.

According to the Royal Malaysian Customs, an approved jeweller has to account for output tax on prescribed precious metals that he acquires locally and net off that tax payable with a corresponding deemed input tax on the acquisition of the precious metal.

Output tax is the GST that businesses charge and collect on their goods and services sold. GST incurred on business purchases and expenses, including import of goods, is known as input tax.

“In this manner, the approved jeweller does not have to pay GST upfront on such acquisitions,” said the customs in the AJS guidelines document.

However, Siow said not every jewellery exporter qualifies for the AJS as applicants are required to obtain a bank guarantee or bond or both to protect revenue, and not everyone can get that bank guarantee.

“I can’t say for certain what the cost [to obtain the guarantee] is as it would depend on a business’ monthly turnover but an applicant will have to fork out roughly RM15,000 to get a RM1 million bank guarantee,” he added.

He said the FGJAM has already submitted a memorandum to the ministry and is awaiting the ministry to finalise a date for a meeting.

The complications created by the GST on locally fabricated gold bars are just one aspect of the broad-based tax effect on the gold and jewellery industry in the country.

To maintain the sales momentum this year, some jewellery companies are absorbing the 6% tax even if it crimps their profit margins – like Habib Group and Poh Kong Holdings Bhd – while introducing new lines of products at more affordable price ranges.

However, at the cost of tens of millions of ringgit a year, Poh Kong for one said its earnings will have to be slashed by RM25 million to RM30 million in the current financial year ending July 31 (FY15) due to the GST absorption – a move that may not be tenable in the long run.

“I think this is more of a makeshift measure – just to absorb the initial costs of the 6% rate and then see how it goes. We would rather have less business, than no business. We have to get them (customers) to not stop buying,” opined Siow.

Retailers have reported a 30% on-year drop in revenue since the GST kicked in, he said, but qualified that the industry had expected worse and that “consumers are still buying”.

Meanwhile, in an email, Poh Kong said it expects to see a 10% sales drop in its FY15.

The company is hoping to bolster revenue by introducing products at lower price ranges to make jewellery more affordable to customers, while it continues to run tactical promotions to drive sales.

“We [will] closely monitor our supply chain to ensure the cost is maintained and not increased during this period,” the company added.

DeGem Bhd executive director Stephen Choong said while DeGem is not absorbing the GST, it is taking various initiatives to lessen the tax impact on consumers, like giving cash rebates.

“The group is willing to make sacrifices in terms of its margins as the utmost priority now is to sustain the business volume it has been enjoying for the past few years,” he said in an email reply. – The Edge Markets, May 11, 2015.