Spreading tax incidence across gold value-chain could eliminate smuggling
Posted by: Clara Fernandes at 8/10/2016 07:31:00 am
· The Indian government faced a potential tax loss of Rs. 2700 crore in 2015 in customs duty foregone due to gold smuggling
· Moderating taxes at first point of entry would eliminate smuggling
· Reducing import duty of 10% on gold to 5% and levying tax on value-added forms of gold in line with global practices would lead to transparency and traceability
· The ensuing India International Gold Conference would discuss the specifics of such policies over this weekend
India August 10, 2016: India imports 99% of its gold demand, mainly in the form of standard gold of 995 fineness, called gold bullion and mined gold, called dore. About 100 institutions mainly banks, nominated agencies and banks, export houses and star trading houses import standard gold. Besides, mined gold (called dore) is imported by licensed refiners for production of refined bars within India. In the next stage of value-chain, standard gold moves through bullion dealers to wholesalers to jewellery manufacturers and then the jewellery gets distributed through 300,000 retailers of which 13,000 are BIS certified. India’s own production of mined gold is estimated at just 3 tons.
Current government policy on tax collection: Gold bullion and gold dore entering India is subject to a duty of 10% and 8.75% respectively. From government point of view, collecting levy at the first point of entry is very effective. Unfortunately, the current high customs duty level has heavily incentivised parallel channel (smuggling of gold). Every kg of gold bullion coming through parallel channel (smuggling) results in a revenue loss of Rs. 3 lakhs to government. World Gold Council estimates parallel channel imports at 100 tons in 2015, equivalent to a potential tax loss of Rs. 2700 crore in customs duty alone.
James Jose, MD, CGR Metalloys Pvt. Ltd. says, “Bullion is a raw material, mostly sold wholesale as B2B, with faster turnaround and least of inventory, whereas jewellery is a retail product sold to the consumers, incurring huge expenses in manufacturing, inventory, marketing and show room infrastructure. Bullion sales have better traceability and ease of monitoring because of the limited number of originating sources, and wholesale outlets unlike jewellery sales.”
Satish Bansal of M D Overseas Ltd further added, “The markets for Bullion &Jewellery are totally different. Those dealing in bullion are concerned with and affected by changes in ITC, RBI policy and custom regulations. Further, they deal with foreign suppliers, banks, customs on a daily basis and keep track of international prices, USD/INR and changes in custom duty on account of tariff value and USD/INR. Jewellery market is more domestic, involving manufacturing and dealing in retail customers within India.”
How have other countries dealt with the issue? Internationally, gold bullion is considered as monetary asset or equivalent of money. Many countries restrict gold bullion entry through canalised imports. Besides, the first point duty is either nil or very low. Thus, all imports are only through official channels and scope for parallel trade is nil. However, when gold bullion is used for value addition, that is for making jewellery or coins and so on, it loses its monetary status and is treated as metal and thus, VAT is levied. Across many progressive developing and developed countries, VAT on gold jewellery ranges between 13% to 18% of the value addition.
So, what is the right policy for India?
India simply cannot adopt policies of other countries. The jewellery supply chain in India is very long and diffused, with a large unorganised and multi-stage jewellery manufacturing sector and with predominance of mom-and pop jewellery retailers beyond tier-1 and tier-2 cities. Thus, collecting tax at jewellery level is expensive and inefficient for government. Second, there is high usage of cash for purchasing jewellery in rural areas, which makes traceability challenging. On the other hand while tax collection at the first point of entry is very simple and highly effective, it opens up challenges from parallel channels (smuggling).
Rajesh Khosla, MD, MMTC PAMP India Private Limited says, “One of the policy prescriptions could be to reduce the first point duty collection to such a level where the parallel trade is not attractive. Various estimates reveal that a customs duty level of 5 to 6% would reduce parallel trade (smuggling) significantly and move at least 75% of the parallel trade to official sector. Thus, government can move substantial business into the official sector through customs duty reduction at a marginal loss in tax collection at customs stage”.
Secondly, as practised elsewhere in the world, government may consider increasing excise duty on jewellery so as to make good the losses. An excise duty levy of 4 to 5% on jewellery may be appropriate.
Need for separate policy for gold bullion and jewellery: Given the uniqueness of gold bullion and gold jewellery value chains - in terms of type of participants, way in which it is organised, level of transparency, risks involved and so on - it is time that government brings out separate policies for gold bullion and gold jewellery. While primary objective may be to improve overall transparency, equally important goals such as eliminating parallel market, protecting customer interests and enabling a growth-oriented value-added manufacturing sectors can be achieved through specific sectoral policies. A discussion on the same is planned at the InternationalGold Conference in Agra this weekend.
India International Gold Convention (www.goldconvention.in):
Foretell Business Solutions Private Limited is organising the 13th edition of India International Gold Convention between 11 and 14 August, 2016 at Jaypee Palace Hotel & Convention Centre, Agra, India.
India International Gold Convention provides an apt platform for the bullion industry to deliberate on various challenges facing the industry, articulate the possible solutions and set an agenda for the development of the industry. IIGC 2015 at Goa hosted a record 580 delegates from all over the world. With the opening up of gold refining sector in India and the announcement of three new schemes, the opportunities were aplenty for the bullion market participants in India. IIGC 2015 bought out all these current issues in the form of presentations, round table discussions and panel discussions.
We hope and expect to see a lot more discussions and deliberations at IIGC 2016 on the current issues with future perspective in mind.