Gold Imports and the Sleight of Hand

Why in news?

Duty-free gold imports meant for exports after value-addition is being routed to the domestic market and such diversion must be checked.

What is the issue?

• An average of 170 tonnes of duty-free gold are imported every year that has found its way into domestic consumption.
• This translates to approximately 7 billion dollars of imports, with customs duty of 700 million dollar and GST of 300 million dollar foregone every year.
• The haul seized from exporters in Hyderabad, Gandhinagar, Mumbai and Kolkata helps set the context to a phenomenon that goes largely undetected.
• The number of cases caught in these instances is surprisingly lower than the conventional smuggling channels such as hand-carry and cross-border/ sea routes.

Gold consumption in India increased to 797.3 tonnes in 2021, the highest in the past five years, according to the World Gold Council data. India is ranked 9^th among the countries that hold the most gold as of 2021.

How it is done?

• The gold is bought from a bank duty-free for export, the manufacturer makes plain jewellery, which typically takes eight days, and sells it in the domestic market against exchange of a bar.
• The bar would go back to the manufacturer, thereby showing work-in-progress for exports.
• Before the end of the 90th day, gold-coated jewellery with underlying copper is exported and that batch is sold in the domestic market as plain jewellery.
• In principle, one could turn the stock at least eight times before exporting and also, at the end, earn the duty differential.
• The entire machinery is well-orchestrated and pre-decided, thereby earning the approval of Indian Customs, and making the export legally proper.
• In spite of the minimum value-addition norm in place, the value of the export shipment is kept lower and invariably remains undetected in an online system monitored by risk protocols.
• Recently, many nominated banks/agencies have been slapped with penalties as they were the importers on record and, consequently, supplied gold to the exporters.
• The source of the problem rests with the buyer of duty-free gold and not the nominated banks/agencies that supply gold to them.
• The investigations conducted by the Directorate of Revenue Intelligence (DRI) highlights the differential duty liability on the nominated banks/agencies and not the exporters, who allegedly indulge in the fraud.

What does the law mandate?

• The Customs law mandates that for making a tax demand beyond the period of two years of import, there needs to be a collusion or suppression of facts on the part of the importer.
• Unfortunately, with the demand being slapped on the nominated bank/agency, the cases do not stand legal scrutiny in the absence of any evidence.
• The exporter, on the other hand, having got away with a small penalty and no duty demand is perpetually tempted to repeat it.
• Gold smuggling continues unabated under the watch of the regulators, making this a challenge.

What is the way out?

• The only possible solution to this is to remove the tax arbitrage and mandate that only GST registered jewellers or those that have unique ID for being a manufacturer for exports can take up manufacturing of jewellery for export purpose.
• There has to be a mechanism in place whereby the nominated agencies/banks are able to track the remittances received by the exporter.
• The India International Bullion Exchange could provide a solution to this problem by shifting the liability completely over to the exporter.
• The exporters need to be mandated to buy gold through the exchange platform against duty bond and linking it with the remittance.

Reference

1. https://www.thehindubusinessline.com/opinion/tax-evasion-in-gold-business/article6508032ece