GST on Diamond Jewellery: Applicability, GST Rate and HSN Code

The diamond jewellery sector suffers from an inverted duty structure under the GST regime. As a result, the 47th GST Council meeting decided to raise the GST on diamond being cut and polished from 0.25% to 1.5%, effective from 18th July 2022. This will resolve the input tax credit (ITC) accumulation faced by the diamond jewellery sector.

Below, we elaborate on the applicability of GST on diamonds and diamond jewellery as it stands today after the changes made by the GST Council. 

Applicability of GST on Diamonds and Diamond Jewellery in India

The applicability of GST on diamonds and diamond jewellery can be a little tricky, as this industry falls under several GST tax slabs. Let’s untangle the levy of GST on diamond jewellery.

After the 47th GST Council meeting, the rate of GST on cut and polished diamonds was raised from 0.25% to 1.5%. This change has been made against an initial notification 7/2018- Integrated Tax (Rate), dated 25th January 2018, where the GST rate on diamonds (only cut and polished) was reduced from 3% to 0.25%.

Furthermore, rough or sawn diamonds are levied a 0.25% GST. Also, the gems and jewellery industry continue to attract a GST rate of 1.5% for job work charges and 18% for grading, certification, and bank charges, among others, on input services procured.

While cut and polished diamonds attract a 1.5% GST, the story changes when these diamonds are worked upon for creating wearable jewellery. This is because diamond jewellery is taxed at 3% and entails job work charges. These diamonds generally fit in with other precious or semi-precious stones taxed at different GST rates.

Impact of GST on Diamond Jewellery

Before the introduction of GST, diamond jewellery was levied an excise duty of 1% and VAT, which varied across the states in the range of 1-1.2%. However, some states, like Kerala, charge 5% VAT on diamond jewellery. Furthermore, a 10% import duty was also applicable on diamond jewellery.

However, after the implementation of the GST regime, the applicable rate of GST on diamond jewellery is 3%. Additionally, unfinished precious stones attract a flat GST rate of 0.25%. Like before, diamond jewellery continues to be levied a 10% import duty.

To illustrate the impact of GST on jewellery, consider a piece of diamond jewellery that costs Rs.1,00,000.

From the above illustration, we can see that the price has come down under the GST regime due to the removal of cascading effect of taxes.

GST Rate and HSN code for Diamonds

To better understand the levy of GST on diamond jewellery, let us first list the applicable GST rates and HSN codes related to diamonds and diamond jewellery. Please note the job work done for making diamond jewellery falls under Heading 9988, “Manufacturing services on physical inputs (goods) owned by others.”

Click here to learn more about the GST rates and HSN codes for gems and jewellery.

How to Calculate GST on Diamond Jewellery?

The levy of GST on diamonds and diamond jewellery becomes complicated due to the concept of composite and mixed supply of goods. As per section 8 of the CGST/SGST Act,  

• A composite supply, which comprises at least two supplies, with one supply treated as a principal supply, will, as a whole, be considered a supply of this principal supply.
• A mixed supply comprising at least two supplies will be levied the GST of that particular supply which attracts the highest tax rate.

Case 1: Composite Supply

To illustrate, assume a piece of diamond jewellery with precious stones. In this scenario, the sale of this diamond jewellery will fall under the category of composite supply. This is because the principal supply is diamonds, while job work has been done, along with the provision of a few precious stones. Therefore, the entire diamond jewellery will attract a 3% GST—the rate levied on jewellery under HSN 7113.

Case 2: Mixed Supply

Consider a scenario where a jeweller promotes the sale of diamond jewellery by clubbing it with the sale of an expensive watch for a promotional event. In such a case, the sale may fall under the definition of mixed supply, thereby attracting an 18% levy (the GST rate on watch) instead of 3%. 

Case 3: Making Charges

If a diamond jeweller sells jewellery worth Rs.5 lakh and the making charges are Rs.50,000, the total amount of Rs 5.5 lakh will attract a 3% GST levy. Here, irrespective of whether making charges are being charged separately, the diamond jewellery will be considered the principal supply.

Case 4: Old/Used Diamond Jewellery- Exemption from GST

When a jeweller purchases a customer’s old jewellery, he is not liable to pay any GST on diamond jewellery. The reason is that this transaction does not result in the furtherance of the business. Therefore, as per Section 9(4), the jeweller will not be liable to pay any GST on diamond jewellery under the reverse charge mechanism.

However, if the jeweller purchases used jewellery from a registered person and sell it, he is liable to pay GST on the total sales amount. But in this case, he can claim ITC on his supply of second-hand jewellery. 

Case 5: Buying New Jewellery Instead of Old Diamond Jewellery

As mentioned above, there is no GST leviable on used jewellery. Thus, even when a customer exchanges old jewellery for new, he will be levied GST in entirety on the new jewellery. For instance, if Rs.1 lakh worth of diamond jewellery is exchanged for the purchase of Rs.2 lakh diamond jewellery, GST will be payable on Rs.2 lakh at 3%, and the price of used jewellery, i.e., Rs 1 lakh, will be deducted from the final amount of Rs.2,06,000.

Case 6: Job Work for Diamond Jewellery

The work done by people hired by jewellers for manufacturing jewellery is called job work. A registered job worker is levied a 1.5% GST on his services. But if these workers rework or repair old or exchanged diamond jewellery, their services will not fall under the ambit of Job work. Instead, their services will attract an 18% GST, classified as labour work.

Place of Supply

As per Section 10 of the IGST Act, 2017, the place of supply for gems and jewellery, including diamond jewellery, is defined as the location where the jewellery movement finally terminates for delivery to the recipients. Thus, a business selling jewellery at its showroom, classified as an intra-state supply, will charge CGST and SGST. Conversely, the inter-state movement of diamonds and diamond jewellery will attract IGST.

As per GST Circular No. 27/2019, dated 28th June 2019, the place of supply in the case of services provided on imported unpolished diamonds and later exported will be determined as per Section 13(2) of the IGST Act, 2017. They must satisfy a condition that after further processing, such as cutting and polishing, these diamonds are not put to any use in India. Therefore, the place of supply, in this case, will be the location of the final recipient when such an address exists on records. Otherwise, it will be the location of the supplier.

Time of Supply

For gems and diamond jewellery, GST becomes payable either when the jeweller receives the final payment or when he supplies the jewellery, whichever comes first.

E-way Bills

For now, e-way bills don’t need to be generated to transport jewellery and other articles specified in the annexure to Rule 138(14) of the CGST Rules, 2017.  

However, the National Informatics Centre (NIC) has recently rolled out an update on the e-way bill generation portal in response to the new mandate by the 47th GST Council meeting. Accordingly, e-way bills will need to be generated for transporting precious stones, including gold (falling under HSN 71) and gold jewellery. 

e-invoicing

The 35th GST Council recommended the implementation of an e-invoicing system for certain registered taxpayers whose annual turnover exceeded a particular threshold limit as specified from time to time. It is expected that, eventually, the system of e-invoicing will extend to businesses generating Rs.5 crore annually. Learn about e-invoicing in detail here.

ITC Availability on Diamonds

A jeweller can claim an input tax credit (ITC) on all purchases to further his business, barring the goods and services disallowed under Section 17(5) of the CGST Act. An ITC can also be claimed on GST paid for services from an unregistered job worker under the reverse charge mechanism.

However, as per a media report dated 30th June 2022, the inverted duty structure of the diamond industry has resulted in an accumulation of ITC claims of over Rs.600 crores. This is because, as per section 54(3) of the CGST Act, 2017, there is no provision to claim a refund on ITC accumulated on the input services for domestic stream transactions that eventually terminate into exports.

As a result, the GST Council decided to rationalise the GST rate on cut and polished diamonds to 1.5%. With cut and polished diamonds comprising over 62% of gems and jewellery exports in FY 21-22, this policy will likely end the further accumulation of ITC while releasing blocked working capital and invigorating the industry’s growth.

Advance Rulings Related to GST on Diamonds

Advance Ruling No. KAR ADRG 35 / 2021, dated 9th July 2021 

Facts of the case: The applicant, M/s Aadhya Gold Private Limited, is a buyer and seller of second-hand jewellery. But it only cleanses and polishes the second-hand jewellery without processing it further and does not claim any ITC. 

Ruling: The Karnataka Authority on Advance Rulings (AAR) stated that the applicant is liable to pay GST only on the difference between the buying and selling price of second-hand jewellery under rule 32(5) of CGST Rules, 2017.

Advance Ruling No. KAR ADRG 16 / 2018, dated 27th July 2018

Facts of the case: The applicant, M/s Rajarathnam’s Jewels, is a partnership company engaged in the retail business of gold and jewellery. The applicant sought an advance ruling on whether the deposit of diamonds in safe vaults accepted by Electronic Vault Receipts (EVR) will be treated as a supply under the GST regime.

Ruling: The Karnataka AAR ruled that a mere deposit of diamonds for conversion into EVR will not be considered a supply of diamonds for GST. 

Conclusion

With the gems and jewellery sector declared as a focus area for export promotion, the Indian government has been taking steps to rationalise the levy of GST on diamonds, especially since rough, cut, and polished diamonds account for over 66% of gems and jewellery exports in FY 21-22. With the hike of GST on diamonds to 1.5%, the government is on track to resolve the accumulation of ITC claims on diamonds.