Gold demand, as the saying goes, will create its own supply, whatever be the wall of restriction. India and many other countries have experienced this during the various versions of the Gold Control Act. This is no more a Third World problem. In the last decade, smuggling was just as much prevalent in Japan as in Vietnam, not to mention the gold that was being smuggled out of China, being a proxy to the dollar. In India, the smuggling apparently is a level above many other countries, an inference one can draw from officially published data.
From the data on gold imports, the gold medallions and jewellery exported and the Customs duty collected, the gold imported after paying Customs duty is derived (see Table). This then has helped arrive at the total gold that was imported for export of fabricated products but not exported (Row F).
Going by the data, which we believe is not a case of over-invoicing the imports, then, we are talking about an average of 170 tonnes of duty-free gold imported every year that has found its way into domestic consumption. This translates to approximately $7 billion of imports, with Customs duty of $700 million and GST of $300 million 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.
How it’s done
The modus operandi is simple. Gold is imported duty-free for the purpose of exports as jewellery, articles, medallions and coins, upon value addition. These imports are through nominated banks/agencies under export-linked schemes. 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. And 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 with sample packets for verification also pre-decided, thereby earning the approval of Indian Customs, and making the export legally proper.
It is intriguing that 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.
In the recent past, 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.
Strangely, the investigations conducted by the Directorate of Revenue Intelligence (DRI) across the country pins the differential duty liability on the nominated banks/agencies, who are the importers on record and not the exporters, who allegedly indulge in the fraud.
What the law mandates
In almost all the cases, the fraud is unearthed 3-4 years after the original commission, when the bond and bank guarantee submitted by the nominated bank/agency on behalf of the exporter with the Customs has been cancelled upon the completion of the exports. The Customs law, however, 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 whatsoever on their role pertaining to collusion with the exporters in the frauds. The exporter, on the other hand, having got away with a small penalty and no duty demand, stands incentivised in the process and is perpetually tempted to repeat it.
As far as the nominated agencies/banks are concerned, the process is the punishment, particularly when they have not indulged in any omission or commission. In this zero-sum game, gold smuggling continues unabated under the watch of the regulators, making this a challenge that is not being legally resolved.
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. Data analytics can play a significant role here for spotting trends.
The India International Bullion Exchange could provide a solution to this problem by shifting the liability completely over to the exporter. This is possible by mandating exporters to buy gold through the exchange platform against duty bond and linking it with the remittance. Till such a process is fully operational, there needs to be a framework to control this unabated smuggling.
Sahay is Chairperson at the India Gold Policy Centre at IIM Ahmedabad and Nambiath is the Head of the Centre