India's diamond manufacturers are looking at setting up cutting and polishing units in Russia for easy access of rough diamonds from Alrosa mines as the central government has yet to come up with a tax structure to enable the country's diamond trade to directly purchase rough diamonds from the special notified zone (SNZ) at Mumbai's Bharat Diamond Bourse.
KGK Diamonds has announced setting up of cutting and polishing unit in Vladivostok in Russia and two more leading diamond companies including M Suresh & Co are looking at opening units in Russia.
Lalit Adani, director at M Suresh & Co, said: "We are keen to set up cutting and polishing unit in Russia and are in talks with Alrosa and Russian government. We will be meeting them shortly. We want to set up a unit in Russia as we can directly procure better sized diamonds from Alrosa mines."
At present, diamond manufacturers can view the diamonds from miners such as Rio Tinto, De Beers, Alrosa and others at the SNZ and bid but they cannot procure it locally. They have to buy diamonds from Belgium, Dubai, Singapore and Russia despite successful bidding at the SNZ. If they could buy rough diamonds on the spot, their transaction cost would go down.
"In the absence of a proper tax structure for trading at SNZ, we fear that Indian diamond companies may shift a portion of their business to Russia," said Sanjay Shah, convenor, diamond panel, Gem & Jewellery Export Promotion Council (GJEPC).
"Russian president Vladimir Putin is inviting diamond trade across the globe to set up units in his country. India, being the leader in cutting and polishing of diamonds, will find it easier to procure raw material and cut down transaction cost if it starts operating in Russia," he said.
For instance, KGK Diamonds has announced that it will be investing 2.8 billion Russian rubles in the Vladivostok unit. The installed manufacturing capacity is 150,000 carats of diamonds per year.
Shah said that the government should come up with a tax structure in line with the carat tax of Belgium for the miners. Carat tax is a clear and predictable fiscal regime that is applied to the diamond trading companies. The regular corporate tax rate - or income tax rate for natural persons - is levied on taxable income that is calculated on the basis of a lump sum margin instead of on the actual margin that is realised.
To supply diamonds in India, miners want the government to adopt a tax structure on the lines of Belgium's.
"But Indian tax authorities want to enter into advance pricing arrangement and fix the tax rate. Miners don't agree to this as they fear that tax outgo may hurt them in those years when business is not good," said Sabyasachi Ray, executive director, GJEPC.
Source: Economic Times