Diamonds Aren't Forever

Over 90 percent of the world’s diamond production, says the Surat Diamond Association, takes place in the city of Surat in Gujarat and yet nothing about the city screams ‘bling’.

- Naini Thaker

Perhaps the twin jolts it has received—the Goods and Services Tax (GST) rolled out by the Centre and the tightening regulations following a bank fraud perpetrated by diamantaire Nirav Modi—in recent times explain the muted sheen of the 1 lakh crore turnover industry.

Before the GST, though, came demonetisation in November 2016, when the government withdrew currency notes of 500 and 1,000 as legal tender. With liquidity being choked, some small and medium enterprises that survived on cash faced closure for a few months, while bigger players faced shrunken profit margins. “Demonetisation happened in the Diwali season [of 2016], which is why a lot of smaller businesses took two or three months to run smoothly,” says Priyansh Shah of Ankit Gems, one of the largest players in the Surat diamond industry, with a turnover of $310 million (2,185 crore) last fiscal and exports to over 25 countries.

Demonetisation was a temporary setback for only the smallest units that couldn’t pay its workers, and the industry at large fought back quickly enough with its large roster of international clients who preferred cashless transactions. But the implementation of the GST from July 1 of 2017 has many of the companies still reeling. Initially, a 3 percent GST was levied on the sale of cut and polished diamonds, but the GST Council later slashed the rate to 0.25 percent. That gave the traders more working capital, but it was more than offset by a 0.25 percent tax on the import of rough diamonds as well as a 5 percent GST on labour. That’s about 800-900 crore that goes to the government, says Dinesh Navadiya, regional chairman, Gems and Jewellery Export Promotion Council. “This is working capital locked with the government.”