The price of 10 gm 24-carat gold at Dubai as on July 5 is Rs 46,246. In India, it is Rs 52,790. It is this price differential, coupled with the customs duty, which gives the incentive for smuggling. The challenge has always been to strike the right balance – impose a duty high enough to reduce profit, but not so high that smugglers feel emboldened to take the risk.
Former chairman, CBIC
While imposition of export duties is World Trade Organisation (WTO)-compliant, it is resorted to rarely, and primarily to discourage exports by making them costlier. The export duties on
products are expected to also generate about Rs 1 lakh crore. GoI has, in effect, struck two birds with one stone – making petroleum products available for the domestic market as well as reducing the loss because of the recent excise duty cuts.
For good measure, the Directorate General of Foreign Trade (DGFT) has also notified that all exporters of these products will be expected to declare that 50% of the quantity mentioned in the shipping bill has been or will be supplied in the domestic market during the current financial year. This will reportedly be a short-term measure – since the revenues that this measure generates will make it tempting to continue with the levy.
As for the import duty hike on gold, given our obsession with the yellow metal, there has always been a high demand. Our annual licit import is 650-700 tonnes. (2021 was an aberration with imports touching 1,067 tonnes, according to the Gem and Jewellery Export Promotion Council.) Further RBI holds, as in end-September 2021, 743.84 tonnes of gold.
According to Arun Jaitley’s 2015-16 budget speech, about 20,000 tonnes of gold were said to be available domestically, gold that was neither traded nor monetised. Despite GoI’s best efforts, this gold continues to languish in vaults.
The impetus for the demand continues to be cultural. The price difference between Dubai, the major source country, and Mumbai continues to make smuggling an attractive option. At the end of the day, smuggling is a trading activity. When there is demand and there are restrictions in any form, supply will seek to evade these restrictions to garner increased profit. All the elements – unsatiated demand, restrictions in the form of customs duty, access through multiple international airports and a porous northeastern border – were always there for gold.
Huge seizures were made by customs officials, with the Directorate of Revenue Intelligence (DRI) leading the charge. According to a May 2022 Press Information Bureau (PIB) release, in FY2021-22, DRI seized 833 kg of gold valued at over Rs 405 crore. The northeastern region has been the most vulnerable, with 208 kg being seized from there. This is apart from seizures made at all the major airports by customs and in states by other enforcement agencies. So, even when the basic customs duty was 7.5%, the profit available in smuggling gold more than made up for the risks.
Undoubtedly, merchandise trade deficit for April-June 2022 at $70.25 billion has increased from $31.42 billion in April-June 2021. The rupee has weakened considerably in the last 6 months. The current account deficit (CAD) is likely to widen to about 3-3.5% of GDP in FY2023.The unprecedented foreign portfolio investment (FPI) outflows, amounting to $44 billion in the last six months, and CAD widening mean that there is a likelihood of the balance of payments (BoP) moving into negative territory in FY2023. (There has also been a surge in imports of gold of late.)
It is in this backdrop that the customs duty has been increased to 12.5% in the hope it will reduce the stress on CAD. The 2.5% agriculture development cess continues, in effect making the duty on gold 15%. It is a moot point if imports will reduce because of this measure – or whether this will further incentivise smuggling.
The price of 10 gm 24-carat gold at Dubai as on July 5 is Rs 46,246. In India, it is Rs 52,790. It is this price differential, coupled with the customs duty, which gives the incentive for smuggling, providing the arbitrage. The challenge has always been to strike the right balance – impose a duty high enough to reduce profit, but not so high that smugglers feel emboldened to take the risk.
With the festive season approaching, there is bound to be a surge in demand and attempts to cater to the demand through smuggling. According to the World Gold Council, the demand is likely to be in the region of about 850 tonnes. Let’s just say that the enforcement agencies have their work cut out.
(The writer is former chairman, Central Board of Indirect Taxes and Customs)
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