The demand for gold, as the saying goes, will create its own supply, regardless of the restriction wall. India and many other countries have experienced this during the various versions of the Gold Control Act. This is no longer a third world problem. Over the past decade, smuggling was just as prevalent in Japan as it was in Vietnam, not to mention gold smuggled out of China, being a proxy for the dollar. In India, smuggling is apparently on a higher level than many other countries, an inference that can be drawn from officially published data.

From the data on gold imports, gold medallions and jewelery exported and customs duties collected, the gold imported after payment of customs duties is deducted (see table). This then helped to arrive at the total gold that was imported for export of manufactured goods but not exported (Line F).

From the data, which we believe is not a case of overcharged imports, we are then talking about an average of 170 tonnes of duty-free gold imported each year that found its way into domestic consumption. . This translates to approximately $7 billion in imports, with $700 million in tariffs and $300 million in GST lost each year.

Loot seized from exporters in Hyderabad, Gandhinagar, Mumbai and Kolkata helps put into context a phenomenon that goes largely unnoticed. The number of cases captured in these cases is surprisingly lower than conventional smuggling channels such as manual transport and cross-border/sea routes.

How it’s made

the modus operandi Is simple. Gold is imported duty-free for export purposes in the form of value-added jewelry, wares, medallions and coins. These imports are made through designated banks/agencies under export-related schemes. The gold is purchased from a bank duty-free for export, the manufacturer makes simple jewelry, which usually takes eight days, and sells it on the domestic market for one bullion. The bar would revert to the manufacturer, thus showing work in progress for exports. And before the end of the 90th day, gold-plated jewelry with underlying copper is exported and this batch is sold in the domestic market as simple jewelry.

In principle, one could renew 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 packages for verification also pre-decided, thereby gaining approval from Indian Customs and making export legally proper.

Curiously, despite the minimum value added standard 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 designated banks/agencies have been hit with sanctions for being the registered importers and therefore supplying gold to exporters. The source of the problem lies with the buyer of duty-free gold and not the designated banks/agencies that supply them with gold.

Strangely, investigations by the Directorate of Tax Intelligence (DRI) across the country attribute the differential obligation to the designated banks/agencies, which are the importers of record and not the exporters, who allegedly engage in the fraud.

What the law prescribes

In almost all cases, the fraud is discovered 3-4 years after the initial commission, when the bond and bank guarantee presented by the bank/nominated agency on behalf of the exporter to customs has been canceled at the end exports. The customs law, however, states that to claim tax beyond the two-year period of importation, there must be collusion or suppression of facts on the part of the importer.

Unfortunately, with the claim being imposed on the designated bank/agency, the cases do not withstand legal scrutiny in the absence of any evidence of their role in colluding with the exporters in the frauds. The exporter, on the other hand, having gotten away with a small penalty and no demand for duties, is incentivized to follow the process and is perpetually tempted to repeat it.

For designated agencies/banks, the move is punishment, especially when they have not committed any omission or commission. In this zero-sum game, gold smuggling continues unabated under the watchful eye of regulators, making it a challenge that is not legally resolved.

The outcome

The only feasible solution to this is to remove tax arbitrage and mandate that only GST registered jewelers (or those who have a unique identifier to be a manufacturer for export) can engage in jewelry manufacturing. for export purposes.

There must be a mechanism in place whereby designated agencies/banks are able to track remittances received by the exporter. Data analysis can play an important role here in spotting trends.

The India International Bullion Exchange could provide a solution to this problem by transferring the responsibility completely to the exporter. This is possible by forcing exporters to buy gold through the exchange against a bond and linking it to the installment. Until such a process is fully operational, there must be a framework to control this relentless smuggling.

Sahay is Chairman of India Gold Policy Center at IIM Ahmedabad and Nambiath is the Head of the Center

Published on

February 24, 2022