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Government needs to carefully assess gold duty hike impact on smuggling and revenue collection, Retail News, ET Retail


 Ahammed MP, Chairman, Malabar Gold & Diamonds
Ahammed MP, Chairman, Malabar Gold & Diamonds

The Union government has raised basic import duty on gold to 12.5 per cent from 7.5 per cent to reduce the influx of gold into the world’s second-largest consumer of the precious metal, after India’s ballooning trade deficit pushed the rupee to a record low. The move is in a complete reversal of last year’s Union Budget proposals, where Finance Minister Nirmala Sitharaman had announced a cut in customs duty on gold to 7.5 per cent from 12.5 per cent.

While it is understandable that the government needs to take steps to arrest the widening gap in the current account deficit, there is a flipside to it too. High import duty gives rise to entry of gold in the country through the illegal route and hinders the growth of the organised retail gold trade.

A higher rate of taxes incentivises smuggling of the precious metal. Some estimates say there is a profit of Rs 6 lakh on every kg of smuggled gold. With the price of gold crossing Rs 50,000 for 10 grams, illicit trade becomes all the more profitable.

But it hurts the consumer confidence in the gold trade which is built on trust and transparency as there is no quality compliance and standardization in case of smuggled gold.

Gold smuggling is one of the major sources of money laundering in the country Along with the growth of mafia groups, they can also have a major impact on the economy. As the Indian Gold Policy Centre estimates, gold smuggling into the country at 300 tonnes per annum, leading to a revenue loss of Rs 20,000 crore. Since the gold import is eclipsed by the amount of the smuggled contraband, the government suffers a huge dent in its tax revenue. Gold smuggling has also changed its route. It has now shifted away from sea routes to air and land routes.

Search and seizure is not preventing smuggling of gold considering the huge profit involved in this illegal business. In fact, the actual amount of smuggled gold reaching the country is several times above the confiscated gold. One should also remember that in countries such as China, USA, Singapore and Malaysia there is no import duty on gold. These nations have removed import duty on gold to strengthen the domestic market.

The government should reduce import duty to bring down smuggling and develop gold as a financial instrument. In fact, Niti Ayog in its report on ‘Transforming India’s Gold Market’ has emphasized that tax policies should be so designed that it enables migration of the largely MSME sector to an organised sector. These can be achieved by taking a decision on rationalizing the import duty on gold and gold doré, as that would remove the arbitrage between Indian and international gold prices thus dis-incentivising smuggling. It will get a parity of pricing of Indian and the global jewellery just making the exports competitive on prices.

Besides cutting import duty on gold, the government should also remove all the levies on gold, make HUID compulsory, ensure transparency in business and bring in 100 per cent tax compliance. All these will bring in drastic changes in the domestic gold market. This will lead to multiple positive outcomes like higher employment opportunities, increase in tax collection and higher foreign exchange earnings through higher exports.

Another major risk that the jewellery sector is facing is the illegal business. Around 70-80 per cent of jewellery sales are done illegally. Currently the GST on gold is 3 per cent and is shared equally by the Centre and the states concerned. However, GST evasion is leading to revenue losses. Government could easily put an end to this tax evading practice.

The Central government’s decision to have compulsory HUID should be strictly implemented. This will make the business transparent. It will also put an end to tax evasion. Awareness campaigns about the future troubles that customers may face by buying gold without a bill should be launched. Along with this the authorities should track the business using digital medium and GST inspection should be made mandatory. Such steps will also ease business transactions done through legal channels.

(The author of the article is Ahammed MP, Chairman, Malabar Gold & Diamonds.)





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