New Delhi [India], February 1 (ANI/Mediawire): India’s love for gold is epic. We love to wear it, we love to gift it, and we love to store it too. India’s gods and goddesses are fond of the yellow metal and the religious institutions are abundant as well.
The temples of India are said to have around 4000 tonnes of metal. Indian households are estimated to be holding on to a whopping 25,000-30,000 tonnes of gold. For festive occasions like pujas, weddings, and birthdays, buying or gifting of gold is an integral part of the culture. No matter how poor, an Indian bride would never leave her parents’ house without some gold even if it is just a trinket.
With culture and tradition linked to gold, little wonder, India is the second-largest consumer in the world. Despite being flaming red hot; the grey side of the yellow metal trade has often been the topic of conversation for the trade and policymakers. The demand for gold means over 300,000 retailers can be found in different parts of the country. As India’s consumption revives after the pandemic, there may a case for the government to visit the tax structure on gold again.
GOLDEN STORY, ‘GREY’ SIDE
The consumer market is great for India but not all of it has a silver lining. India’s affair with gold has a grey side to it as well. According to the World Gold Council (WGC) estimates, at least 100-120 tonnes of the precious metal are smuggled into the country. A Canada-based group IMPACT puts this number at a much higher 200 to 225 tonnes. This is nearly 25 percent of all the gold coming into India!
The favourite destinations for gold to find its way to India via the grey market has been the Middle East nations. Estimates suggest that up to 75 percent of gold brought illegally has been from these nations. But the pandemic has also altered this business practice and the locations from where gold is being smuggled. With restrictions on air routes, smugglers have now switched to the land and sea routes. Myanmar appears to have emerged as the favorite gold smuggling destination.
According to the annual report of the Directorate of Revenue Intelligence (DRI), one of the revenue enforcement agencies under the Ministry of Finance, of Rs. 1,200 crore worth of smuggled gold seized in 2020-21, almost two-thirds i.e. around 240 kgs were of Myanmarese origin. A large chunk of the smuggled gold is also coming in through the international waters of Sri Lanka and the porous borders of Thailand, Nepal, Bangladesh, and Pakistan which often go untracked. There is not enough information for the scale of this problem, but it does throw another challenge for the policymakers. Of up to 200 tonnes of the precious metal that manages to enter through the grey market into the hands of consumers – retail or wholesale, a lower rate of import duty could add to the government coffers.
TAXES ARE TAXING!
High taxes on gold have proved to be counterproductive. It has not helped in increasing the government’s revenue. As the industry points out, it is the high taxes that are helping the grey market not just thrive but get bigger and better. India is estimated to be losing upwards of $1.3 billion. The Niti Aayog in its report titled ‘Transforming India’s Gold Market’ has stated that high import duties have been encouraging unofficial gold business in a big way.
“Cheaper import in the grey market encourages unofficial gold business in a big way. The resultant gap in the price of official gold imported through the banking channel and unofficial imports is hurting the entire group of manufacturers/retailers/ bullion importing agencies/refiners and many others involved in the tax compliant business systems,” the Aayog said in the report. “The high import duty is indirectly creating a disincentive to the organized players in the industry. A lower Basic Customs Duty (BCD) on gold should help make the unofficial route for gold imports unattractive. Accordingly, the duty on gold should also be reduced,” the Aayog pitched for in the report. India losing money due to smuggled gold is only a part of the country’s big, wide, and buzzing grey market problem. According to the CII’s Economic Matters, December 2020 research paper, there are about 300,000 jewelers in the country. A large number of them prefer to buy and sell gold through the unofficial route. It is estimated that almost 80% of the gold market is grey. An effective tax rate of a shade under 15 percent, which includes import duty, agricultural cess, countervailing duties and GST at every point of sale, does hurt trade. According to the World Gold Council, it is making the grey market attractive. “It is the responsibility of every customer to ask for an invoice for the product they purchase. At every Malabar showroom, our staff have been trained to educate the customers the importance of the bill,” MP Ahammed, Chairman, Malabar Group said
STATES MISS SILVER LINING
Tamil Nadu, Kerala, Andhra Pradesh, and Punjab are the leaders in consumption of the yellow metal. Their earnings from tax collections on gold have been hit hard over the last few years. It is true of several others too and it is showing up in their annual collections. Despite gold prices having moved up in the uncertain times over the last year or two, the tax collections are not showing up for the government.
As per the National Sample Survey Office (NSSO) data, the state’s per capita expenditure on gold ornaments is Rs. 208.55 per month in rural and Rs. 189.95 per month in urban areas. Keralites are the biggest consumers of gold in India. Kerala is not just God’s Own Country but Gold’s Own Country too. The story is no different for neighboring states of Andhra Pradesh and Telangana. These two states are estimated to be losing over Rs 800- 1,000 crores due to the smuggling of gold and tax evasion.
TOWARDS DIGITAL GOLD?
Many banks and other platforms are highlighting the benefits of digital gold. As India continues its speedy forward march towards a Digital India, the shift towards digital gold could provide the silver lining to the vexing problem of the grey market.
Digital Gold can be bought for as low as Re 1. As the name suggests, all transactions of digital gold will be online ensuring transparency and accountability. Several big jewelry chains have online gold jewelry buying facilities, but the mindset of the customer needs to change. While the young executives and young female professionals could easily opt for buying digital gold or buy gold online, the challenge could be making the elder generations who are the real, big buyers of gold, switch from buying gold physically to buying it online just by the look of it. The move to go digital will also add to the efforts of transparency and traceability that the industry has been talking about. The HUID or the hallmark unique identification program launched in 2021 aims towards this. Lower taxes could be great for the industry as well as the consumers. That could also mean improved tax compliance, resulting in higher collections for the government and all the stakeholders. “The key is to unlock the value of digital gold holding by making it on par with any other financial instrument, i.e., converting it into a traceable financial asset”, the December 2020 edition of CII in Economy Matters says. If only digital gold could shine half as bright as the real one!
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