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VAT and higher prices suck glitter out of gold

All the glitter has gone out of the UAE’s gold and jewellery sales since the start of the year, with leading retailers confirming sales declines — in volume terms — by more than half of what it used to be in the fourth quarter of 2017. Average daily sales are now at about 500g to 1kg of gold (including in jewellery format) as against the 2-3kg before the New Year.

The difference in consumer demand is starker when compared with the volumes jewellery retailers were drawing between December 26 and December 31, 2017, which was when the Dubai Shopping Festival (DSF) 2018 took off with 1kg of gold being raffled out each day.

During those six days, leading retailers were averaging between 7 and 12kg each day across their store networks, making it the best sales phase ever since early 2016, when international bullion prices slipped suddenly and sparked off a retail buying surge in the UAE. (In February-March of 2016, prices had dropped to $1,050 an ounce, its lowest point in five years.)

“Yes, VAT [value-added tax] has affected — but UAE shoppers had already done a lot of pre-VAT buying of gold right through December,” said Abdul Salam K.P., Director at Malabar Gold & Diamonds. “In fact, December could be the best month ever for UAE’s jewellery sales, and much of that happened in the last six days of the month. There were queues leading up to jewellery stores, in some places.

“I think the volumes attained in December are higher than what we saw during early 2016. After such a rush of buying and with VAT in effect, January was always going to be difficult. What needs to be seen is how quickly, shoppers will return to buying. Would it be by the end of this quarter? Or will it take longer? We will like to seen answers to that at the earliest.”

Since January 1, apart from the 5 per cent VAT on gold jewellery, bullion prices also conspired to depress demand in the UAE. January 1 had international bullion at $1,303.5 an ounce and since then it has gained to close at $1,321.7 on January 7, And for comparison’s sake, it was in the $1,282 an ounce range on December 26 and on December 20 at about $1,265.

“Some amount of drop in consumer demand was to be expected because of VAT, but I don’t think changes in the international bullion prices played a large part,” said Cyriac Varghese, General Manager at Sky Jewellery. “In Dubai, on a per gram basis, the increases were only about Dh2-Dh3. UAE consumers have taken higher increases than that in their stride in the past.

“The early January drop had all to do with UAE residents taking time out to absorb how VAT will affect their day-to-day expenses. Once those adjustments are made, they will return to jewellery buying.”

So far, most jewellery retailers have refrained from absorbing VAT related costs across the board. Instead, they are focusing their attention on payments through instalments and through promotions. Some retailers, like Pure Gold and Sky Jewellery, have announced limited-time VAT-free campaigns. In Sky’s case, all purchases done at its Gold Souq store will have the retailer absorb the VAT charge.

According to market sources, VAT’s impact on diamond jewellery purchases is still being assessed. “All retailers are still trying to learn the processes associated with the new tax,” said Chirag Vora, Managing Director of Bafleh Jewellery. “Plus, the industry had a phenomenal December, which will subsidise for the lower January sales.

“But I don’t believe that the 5 per cent will have a major effect on diamond jewellery. The margins in the diamond industry are marginally higher than for gold and a retailer will be able to absorb the 5 per cent VAT if need be.”

VAT status on loose diamonds

As per the ministry guidelines, all investment-grade gold — such as 10-tola and 1kg bars — are zero per cent rated under VAT.

Initially, industry sources were expecting rough diamonds to be treated similarly. But according to Chirag Vora of Bafleh Jewellery, “So far there is no clarity on the VAT on loose or rough diamonds. As per the executive decision these items are subject to VAT and hence sales of these items is currently at a halt. The industry is awaiting further clarification on the classification of these assets.”

Source: Gulf News

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