Demonetisation Changes inDustry LanDsCape

Chartered accountant (Dr.) SURESH SURANA, founder chairman of RSM Astute Consulting Group, decodes the implications of demonetisation for the gem and jewellery industry and advises the quick adoption of digital payment modes to bring in greater transparency.

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the implications for the industry and the way forward.

Industry needs to improve its governance & perceptionIt is paradoxical that despite being the third largest export industry and its vast employment intensity (over 2.5 million workforce), it is always viewed with suspicion by the tax and regulatory authorities. It is high time for the industry to change its perception and improve its self-governance. The players who bring disrepute need to be weeded out. The move of demonetisation has brought some challenges on the tax and regulatory front. There are a few instances of searches (raids) and surveys of jewellers allegedly helping tax evaders. Further, tax authorities are using power given under section 133(6) of the Income-tax Act (the ‘Act’) to get the details of quantity of stock held by them and sales made beginning November 7. In this context, it is important to reconcile the cash deposit

he demonetisation of R500 and R1,000 currency notes from November 8, 2016 (86% of the

currency in circulation), has been one of the most significant monetary decisions taken by any Indian government. There are several dimensions of this decision such as slowdown of the economy, liquidity crunch and hardships, greater transparency and shift from cash to digital economy, reduction in black money and corruption, counterfeit currency or fake notes, countering terror funding and so on.

The World Bank estimated the size of the shadow economy for India at 23% of the Gross Domestic Product (GDP) in 2010. There are sharply contrasting viewpoints on the benefits and demerits of this move and as it is an unprecedented “experiment”, the actual outcome will be known only in the next 3-6 months.

One of the sectors which has been most impacted by this major development is the gems and jewellery industry and in this article, I have attempted to analyse

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with sale made and inventory in hand and compliance with the Tax Collected at Source (TCS) requirement and obtain and maintain the Permanent Account Number (PAN) of the customers.

Recently, the Central Board of Direct Taxes (CBDT) has clarified that an increase in turnover due to acceptance of payments through digital mode shall not in itself be the criteria for scrutiny assessment.

Need to digitise business & embrace technologyIt is important for the industry to realise and accept that every single business is moving towards digitisation. Retail sales are moving to companies like Amazon and Flipkart, travel bookings are moving to companies like Makemytrip and Airbnb, movie ticket bookings are moving to Bookmyshow, and taxi usage is moving to Ola, Uber and so on. The gems and jewellery industry is no exception and demonetisation has only accelerated the process of digitisation.

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It is important for every reasonably sized jeweller to have a digital payment/receipt capability such as debit card/credit card swipe machines, e-payment wallets like Paytm and e-banking facility, and Unified Payment Interface (UPI) payment system. Jewellers must have an e-commerce platform and the ability to showcase and sell products on the net and partner with e-commerce marketplaces.

We are in an Information Age revolution and it would be preposterous to presume that we will not be impacted by this tsunami. Technology can result in significant improvement in customer reach and productivity and you can be the winner rather than victim of this change.

Limited impact on exportsThe total exports of gems and jewellery are estimated at $40 billion and the demonetisation has very limited impact on this sector except for the need to restructure its labour compensation. The rupee has been stable after the initial weakness and with the US economy showing increasing signs of strength, the export-focused industry will largely remain unaffected by this change. There

may, however, be some marginal impact for the traders and intermediaries due to greater digitisation and transparency.

Crippling slowdown in domestic salesOver 90% of the jewellery in India is mainly sold by traditional family jewellers, and the unorganised sector contributes to about 96% of the total jewellery sales in the country. The industry is characterised by highly unorganised trade, labour-intensive operations, working capital and raw material intensiveness, price volatility of gold and export orientation.

The decision to abolish the high denomination notes has resulted in a major slowdown to the extent of 50% in domestic sales due to the cash crunch during the festive and marriage season. Earlier this year, the industry had suffered heavy losses due to the strike against levy of excise duty. As such, the industry was expecting to see a spike in jewellery sales during the peak marriage and festive season. The small and mid-tier firms are starved of cash and they are finding it difficult to make cash payments to their workers. Considering that adaptation to the new technology for

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payments will take some time, there shall be an immediate short-term impact on the businesses which are highly cash-oriented. The medium-term and long-term solution is to embrace digitisation and technology.

Vast implications for workforce The diamond and jewellery industry provides employment to nearly 2.5 million people with the potential to generate employment of 0.7 to 1.5 million over the next five years. However, it continues to be dominated by the unorganised sector and a large proportion of the workforce is paid wages in cash. It is likely that due to digitisation and the proposed increase in limits for provident fund coverage, the industry will move towards the organised sector. This is likely to push up the labour cost in the short to medium term and the industry will need to focus on improved productivity and stabilising the workforce.

Gold to remain an investment optionThe sudden demonetisation has once again reinforced the faith in gold as an investment option. For centuries, Indians

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have regarded gold to be an all-season investment and in the present volatile, uncertain, complex and ambiguous (VUCA) world, it is indeed one of the hedging instruments for the common man.

Shift of business to organised sectorAs a consequence of demonetisation, it is expected that the share of organised jewellers would increase further over the medium and long term, as small and medium-sized retailers would find it difficult to cope with the stringent compliance measures introduced or proposed to be introduced. These include: levy of excise duty, PAN card disclosure requirements, complying with TCS provision, proposed introduction of Goods and Services Tax (GST). Early adoption to new technology for seamless payment would be the only way forward and which shall also see the movement from unorganised trade to organised trade.

Jewellery sales would gradually pick up momentum and get normalised with people getting comfortable with the digital payment system. While consumers in urban areas would not take much time getting habituated to the use of cards

and online fund transfers for jewellery purchases, consumers in rural areas, which contribute a major chunk of total sales, would take some time to adapt.

Exciting long-term outlookDemonetisation may slow down the demand for gems and jewellery in the short to medium term; however, the industry will achieve, without much difficulty, its pre-demonetisation growth rate because the long-term fundamentals of the industry remain strong. India has a young demographic, one of the youngest in the world. With the growing economy, the spending power of people is also increasing. India’s new income growth will come from the surging middle class and entrepreneurs, leading to growth of jewellery demand in India. The sector is the second largest foreign exchange earner in the Indian economy, contributing approximately 15% to the total export earnings of the country.

Further, as more and more businesses switch to the digital payment mode, it will bring transparency in conducting business.

The deposit of abolished high denomination notes into the banking system has led to a sudden flush of funds with the banks which will be utilised for onward lending for commercial activities. This would expectedly lead to a fall in the lending rates. In this scenario, even gems and jewellery companies, which are now facing tightened bank credit, could be beneficiaries of the low interest rate regime. As this industry is labour-intensive, the access to credit for this industry can generate many positive spin-offs.

In the coming years (including the upcoming Budget 2017), there will be an increase in the tax base and tax-to-GDP ratio as a result of which the government may have room for reduction in income tax rates and tax incentives resulting in higher disposable income.

To conclude, the gems and jewellery industry will certainly regain momentum in the medium to long term after the short-term hardships and the re-engineering of businesses.

CA (Dr.) Suresh Surana is the founder chairman of RSM Astute Consulting Group. A chartered accountant by profession, he has completed his doctorate in business administration from the University of Mumbai.

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Your company went the digital payment/selling route long before demonetisation was announced. As an online retailer with a digital payment gateway already in place, has demonetisation had any impact on your business?While we saw a significant impact on sales in the first 3-4 days immediately after demonetisation, sales picked up subsequently both online and at our stores and we went on to deliver a very healthy revenue growth for the month. In the first 3-4 days after demonetisation our average daily sales fell by almost 25% of our daily average. The following week, however, we were back to our normal sales and closed the month in high double-digit growth.Our customer profile is such that most of them used to anyway pay by credit or debit cards. So the impact on sales due to demonetisation has been fairly insignificant.

Will demonetisation give rise to a whole new segment of online jewellery shoppers as they get more comfortable with e-transactions?At CaratLane we offer multiple payment options to our customers,

which include credit card, debit card, online transfer, cheque, cash deposit or money transfer through Western Union, and cash on delivery. With demonetisation, our expectation is that the cash-on-delivery payments will continue to fall and customers will adopt other modes of payment.

Have you noticed an increase/decrease in visitor traffic to your website in the past few weeks? Have jewellery buying patterns changed: for instance, are high-value items in greater demand now versus earlier?We continue to see a very robust month-on-month growth in traffic to our website. We have not seen any change in the jewellery buying pattern so far.

What are your popular products and price brackets?Our products always come with a unique CaratLane touch, be it in the form of innovation in style or technique. Pendants, necklaces, earrings and bracelets are among the top items purchased from our site. We have 5,000 items listed on our website with an average price of H25,000.

Kindly comment on the Indian government’s push towards digital banking and the implications this will have for the e-commerce business model in general as well as for your own company.Digital banking is a good step taken by the government. It will lead to more transparency and accountability in the economy and this will benefit not just the e-commerce players, but retailers in the traditional organised sector as well.

How do you see online jewellery retail evolving in India over the next few years?There is a huge opportunity for online jewellery retail in India as it provides immense benefits to customers, including the ability to browse through a large portfolio of products without going to a physical store. It also brings in a new level of transparency, with all product specifications and prices clearly mentioned on the website. As internet connectivity continues to improve and more and more customers adopt e-commerce, online jewellery retail will continue to benefit from this transition.

MIthuN SaChEtI, the cO-fOunder and ceO Of caratLane.cOm, a tanIshq partnershIp fIrm, speLLs Out the many pOsItIves

Of demOnetIsatIOn and Its effect On e-taILIng.

‘Digital Banking a gooD Step By the government’

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As an online retailer with a digital payment gateway already in place, has demonetisation had any impact on your business?We certainly felt the impact of demonetisation like any other industry, however we are witnessing a gradual shift to normalcy. A large percentage of our orders were already prepaid orders and via card on delivery.

Have you noticed an increase/decrease in visitor traffic to your website in the past few weeks or a change in jewellery buying patterns? traffic to our platforms has not been affected by demonetisation. What we are witnessing is a gradual shift from cash to pre-paid online transactions irrespective of the value of the product or the segment.

Will demonetisation give rise to a whole new segment of online jewellery shoppers as they get more comfortable with e-transactions?the younger generation is adept at e-transactions and already prefers digital modes of payment. We expect to witness a shift in people who were so far comfortable only with cash payments to move to online transactions. This would also result in them continuing to use digital payments even after the cash crunch eases.

What are your popular products and price brackets currently?The various product categories that we have on offer include earrings, pendants, bangles, bracelets, nose pins, necklaces, mangalsutras and chains. Some of our popular collections include our recently launched tropical paradise and florentine along with Lattice (3d designed), Boardroom glam, Bon voyage, Onyx and starBurst. prices range from about H2,000 to H8,00,000 depending on the level of customisation. We also offer customised solitaire options well beyond this price range.

How do you see online jewellery retail evolving in India over the next few years?the fine jewellery segment is currently valued at $60 billion and is expected to be $100 billion in the next four to five years. Online contribution is expected to reach 1-2% by then. We believe this is a huge opportunity for us to capitalise on. n

arVINd SINGhaL, cOO, BLuestOne.cOm, eLaBOrates On the Impact Of demOnetIsatIOn On jeWeLLery e-taILers.

‘We’ve Seen a Shift from caSh to pre-paiD online tranSactionS’