Govt to clear air, keep diamond trade out of service tax net

The uncertainty over whether diamond cutting and polishing would be covered under service tax has come to an end with the Central government set to clear the air by issuing a notification stating it would not be applicable.

The notification is expected on Thursday.

According to Bakul Mehta, chairman, Gem and Jewellery Export Promotion Council (GJEPC), the move would bring down the escalation in cost by 2-3 per cent and is viewed positively across the industry.

An industry source told Business Standard that diamond cutting and polishing is classified under manufacturing, and hence the question of service tax being applied on the industry never arose.

"However, the unclear notification released by the Union ministry of commerce after the Budget had led to the confusion," he said.

The notification is expected to state that no service tax would be applicable on diamond cutting, cleaving, bruting and polishing.

"This would be irrespective of whether all these procedures are carried out in-house at one place or in different units," the source said.

But it is not yet clear whether service tax would be applicable to laser sieving and laser curfing of diamonds.

"These are also parts of the diamond manufacturing process, but they are done on a jobwork basis. The notification does not mention anything about laser sieving and curfing, so it is not yet clear whether they would attract any service tax," another industry expert said.

The commerce ministry needs to clear the air in this regard too, he added.

But the industry would not be affected much if service tax is levied on laser sieving and curfing.

"The amount of tax applicable on laser sieving and curfing would not be huge by any means, as a very small percentage of diamonds have to be processed with laser machines. The smaller diamond cutting units would however, certainly be affected," a leading diamond exporter of Surat said.

The industry had collectively made several representations to the government to exempt it from the service tax net after the announcement in the annual Union Budget.

"The diamond industry would have been in major problems if service tax was imposed on it. Now that the issue is being sorted out, it will be able to concentrate on work, rather than worrying about anything else," said Nanu Vanani, president, Surat Diamond Association.