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Gem industry criticises removal of income tax exemptions

06 Nov 2022

  • Industry warns of catastrophic impacts 
The proposed amendment to introduce corporate income taxes for businesses engaged in the gem and jewellery industry in the backdrop of the Social Security Levy of 2.5% will have a catastrophic impact on the sector, industry sources claim.  Speaking to The Sunday Morning Business, former Chairman of the National Gem and Jewellery Authority Thilak Weerasinghe revealed that he had spoken to Central Bank of Sri Lanka Governor Dr. Nandalal Weerasinghe about not proceeding with this tax amendment in its current form and had requested him to maintain the status quo and allow the tax exemption applicable to the gem and jewellery industry to continue, considering the nature of the industry. Explaining further, he stated: “The gem industry is a low-margin business. Therefore, when we are taxed, we are unable to invest in new inventory. Additionally, when this new 2.5% tax applies to our turnover, the situation is made worse.” Since 1971, the gem and jewellery industry had not been subjected to income tax until the introduction of the 2017 Inland Revenue Act, whereupon the industry was taxed at a rate of 28%. The income tax rate was thereafter reduced to 14% following lobbying and in 2020 the industry was wholly exempted from income tax under the instructions of former President Gotabaya Rajapaksa. An industry source revealed to The Sunday Morning Business that typically purchases were not made for a particular sale and instead gem traders bought whatever was available and subsequently found an interested buyer.  Moreover, the reality for a large section of gem traders is that gem trading is a low-margin business with profits made on volume. Hence, it is essential for any gem trader to have cash in hand to purchase inventory as they become available. A sudden tax would dry up their liquidity, preventing them from building up inventory.   “When taxes are imposed in this manner and we have no cash in hand, we cannot survive in this industry. When we buy, we don’t purchase based on a sale; we purchase whatever is available. Whenever something comes up, we purchase it, regardless of the existence of a sale. Whenever we want a particular stone, it is impossible to enter the market and acquire it on short notice. Therefore, gem traders must always maintain large stocks,” he explained. He also pointed out that the gem industry largely operated on long-term relationships. When a supplier presents a batch, it is expected that the entire batch will be purchased by the trader. Failure to do so will lead to the supplier moving away and due to the high demand in the industry, it will be difficult to recover a supplier once lost.   


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