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Smuggled Gold Pouring into India as Consumers Dodge Taxes

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An increase in the import duty hasn’t dampened Indians’ appetite for gold. It’s just pushed the market underground.

Gold is such an important part of the Indian economy, people will do whatever they have to in order to get their hands on the yellow metal – including skirt the law. According to a recent report by the Hindu, occurrences of gold smuggling have risen rapidly in the wake of higher import taxes.

Ever since the import duty on gold was raised to 10%, the country has reportedly witnessed a rapid rise in the quantum of gold brought into the country illegally. Currently, government levies total 13%, including IGST of 3%.”

Government efforts to crack down on smuggling have proven largely ineffective. Officials estimate customs agents and police have intercepted less than 10% of the gold entering the country illegally. Police do a better job of catching smugglers traveling by air from West Asia and south-east Asia, but officials say gold brought in through the international waters of Sri Lanka and the porous borders of Myanmar, Thailand, Nepal, Bangladesh, and Pakistan is seldom tracked.

All-told, officials estimate smugglers bring in 200 tons of gold or more into the country every year, and that number continues to increase.

The tax man is trying to get a take on both sides of the transaction. In addition to the 10% import duty, the government levies a 3% goods and service tax (GST) on jewelry sales. The new tax went into effect over the summer. Many analysts think the revamped tax structure will ultimately increase the demand for gold by making the supply chain more transparent and efficient. But in the short-run, the tax seems to have simply motivated people to find creative ways to avoid paying it.

The 3% GST, as against 1% VAT earlier, is pushing a large portion of jewelry trade to the grey market, an industry watcher said. If end consumers were unwilling to pay 3% GST on jewelry purchases, it forced jewelers, who had earlier invoiced with 1% VAT, to conduct sales without invoicing.”

Association of Gold Refineries and Mints secretary James Jones said tax avoidance on the retail side is increasing the demand for smuggled gold.

These unaccounted funds at jewelry shops are then used for their raw material purchase of bullion, leading to the growth of a large, parallel economy for unaccounted bullion, much to the dismay of the organized sector.”

Some officials see the writing on the wall and are calling for a repeal of the import tax scheme.

“The grey market can be disincentivized only by bringing down the net of levies to realistic levels of 6%,” said Ahmedabad-based bullion dealer, Haresh Acharya.

Even with the taxes, gold demand in India remains robust. After nearly tripling in August, demand remained strong in September. Gold demand rose 31% year-on-year last month. Imports came in at 48 tons. Keep in mind – that’s the official import total and doesn’t factor in the grey market.

Indians have a love affair with gold. It’s not just a luxury. Even poor people buy gold in India. The yellow metal is interwoven into the country’s marriage ceremonies and cultural and religious rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these poorer rural areas, where the vast majority of people live outside the official tax system. According to the World Gold Council, Indian households hold over 22,500 tons of gold. Every government effort to “mainstream” and capture the gold economy has failed. It shows the power of the yellow metal. It is virtually impossible to micromanage and control. That’s why so many Indians own gold – no matter what the government does.

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