It is common sense that given the humongous size of the market with huge revenue and foreign exchange implication, the country’s gold trade deserved strict end-to-end surveillance and monitoring to cover the entire gamut of activities covering import, processing, domestic sale and export.
Despite the urgent need for strict regulation, the policymakers have continued to treat the gold sector with kid gloves for no apparent reason or logic. Lack of formal supervision tends to breed corrupt practices. No wonder, a section of the gold trade feels emboldened to conduct business in a way that results in non-genuine or spurious exports and possible round tripping all of which leads to massive loss of revenue for the exchequer.
The India Gold Policy Centre at IIM Ahmedabad has estimated that about 170 tonnes of gold valued at close to $7 billion (over ₹52,000 crore) escapes the tax net and the total revenue loss is an estimated $1 billion equal to about ₹7,500 crore (BusinessLine, February 25).
This state of affairs in the gold sector should ring alarm bells in the corridors of power.
The gold trade has often been demanding a cut in the rate of taxes including Customs duty, suggesting that duty reduction would reduce the incidence of illegal import or in plain-speak, smuggling.
We must remember that large-scale smuggling with dhows laden with gold reaching the country’s shores is by and large a thing of the past. Technology has enabled far superior coastal surveillance these days. Yet, traders’ creativity knows no bounds. There is innovation in the form of spurious export and round-tripping in collusion with those who ought to be preventing it.
The policymakers have to take immediate cognisance of large-scale revenue leakage. A few simple steps, eminently implementable, can be taken. The objective is to create an end-to-end audit trail of how the goods move from the point of import till the end-consumer.
Plugging revenue leakage
The first step would be to stop duty-free import of raw material (gold) for servicing export orders. This is the root cause of all problems. Mandate that the business entity with export order (for value-added gold such as jewelry) must deposit the duty amount with the designated authority at the time of import clearance. It is also advisable and necessary to ascertain the source of funds of the business entity.
Second, reduce by half the period allowed for value addition and export from the current 90 days. This will discourage illegal diversion of the precious metal (meant for export) to the domestic market.
Third, strict assaying and monitoring of value-added products export to ensure that what is actually exported is what has been declared for export. This calls for higher levels of integrity in supervision and certification by the Customs officials. It is also necessary to ensure that the export proceeds are actually received in the country through authorised banking channels.
Fourth, it may not be out of place to commence a forensic audit of the books and working of exporters whose operations are suspect in the eyes of the authorities. Forensic audit would send out a strong signal to all the stakeholders in the country’s gold trade to become disciplined.
In doing all these, technology will come handy in systematically tracking the whole gamut of activities covering import, source of funds for import, sale to jewelry makers, export of value-added products and export value realisation.
Without doubt, gold trade — both domestic and export — is important for the county for its contribution to employment generation, export earnings and revenue for the exchequer. It is important to ensure that the whole trade is not disrupted because of the illegitimate activities of a few. However, if strict action is not taken against erring traders, it can lure more and more into the trap of undesirable economic activities.
As a large importer and consumer of the precious metal, we must have systems in place that would advance transparency. Despite being a large market for gold and with the ability to impact global prices, the perception about India in the international arena leaves much to be desired. The policymakers must wake up to the ground realities and get cracking with policies and procedures that would ensure greater transparency.
The writer is a policy commentator and commodities market specialist. Views are personal