China’s gold market is undergoing a transformative shift due to a significant overhaul of the value-added tax (VAT) regulations. This reform marks the end of an era where substantial tax deductions were available for most gold transactions processed through the Shanghai Gold Exchange (SGE) and the Shanghai Futures Exchange (SHFE).
The Ministry of Finance and the State Taxation Administration introduced these changes on the same day that adjustments for taxes on platinum and diamonds were also implemented. However, the new VAT structure for gold specifically aims to revise the tax framework that governs its entire supply chain.
Changes in VAT structure
Previously, when members withdrew gold from SGE or SHFE vaults for creating jewelry or branded bars, they were able to receive a full 13% Special VAT Invoice. This allowed them to offset the tax against their output VAT, resulting in a minimal tax burden. Essentially, VAT was only applied to the value added beyond the gold’s base price, which contributed to keeping jewelry prices relatively low, even as global gold prices increased.
Now, the taxation approach has been bifurcated, differentiating between gold withdrawn for investment purposes and that intended for non-investment uses. While SGE and SHFE members engaged in buying and selling on the exchanges still benefit from VAT exemptions, the taxation dynamics have fundamentally changed once gold leaves the vaults.
Investment products remain largely unaffected
For investment gold, such as bars manufactured by commercial banks or gold ETFs trading on the exchanges, the taxation mechanism continues to apply solely to the value added. This ensures that the cost structure remains low for banks and significant investment channels. However, a critical change is that SGE members can no longer issue special VAT invoices to their clients, preventing downstream buyers from claiming tax credits on their sales.
This alteration is expected to encourage more investors to procure gold directly from SGE members. These members can offer lower effective prices as they retain the advantage of tax credits at the first tier of sales.
Impact on the jewelry sector
The ramifications for the non-investment gold market, particularly the jewelry industry, are much more pronounced. With the new changes, members withdrawing gold for jewelry production can now deduct only 6% of their costs as output VAT, reduced from the previous 13%. Additionally, the SGE has shifted to issuing ordinary invoices instead of special ones, which eliminates an additional layer of tax offset.
Market analysts project that these changes will considerably increase the tax burden on jewelry manufacturers, likely pushing consumer prices up by approximately 4% under typical circumstances. Some retailers have already noted price increases since the policy took effect.
Shifts in consumer behavior
The new VAT regime has also leveled the playing field between SGE members and independent jewelers. Non-member participants, such as small banks and standalone jewelry stores that open accounts through SGE members, now face similar restrictions as those withdrawing gold for non-investment applications. Feedback from the World Gold Council (WGC) indicates that these non-member entities have raised their bar prices by around 13%.
In light of these reforms, there is a noticeable shift in consumer purchasing patterns. As consumers become more aware of the markup on jewelry and the narrower buy-sell spreads on investment products, retail investment in gold bars surged significantly, reaching the highest level observed in recent years. Conversely, jewelry consumption plummeted, reaching its lowest point since the onset of the pandemic.
Responses from the financial sector
The impact of the VAT changes has extended to the banking sector as well. Reports indicate that the China Construction Bank suspended new applications for certain gold purchasing accounts immediately following the tax reforms. Similar actions were briefly taken by the Industrial and Commercial Bank of China, illustrating the uncertainty among financial institutions regarding the potential shifts in client behaviors driven by the new tax incentives.
Despite the challenges faced by the jewelry sector, investment demand for gold appears poised to strengthen in the near future. The WGC has noted that buyers of gold bars and coins will not incur additional tax liabilities as long as they purchase directly from SGE members. With expectations of rising gold prices and the ongoing economic uncertainties in China, coupled with the People’s Bank of China’s steady acquisitions of gold, investment interest remains robust.
Analysts consider this reform to be the most consequential change in the gold market’s tax landscape in recent times. However, the full effects of this new VAT structure are expected to be observed as the peak buying season approaches and consumer preferences continue to evolve.