Gold is a strange metal-or to quote Thomas Moore’—gold, which in itself is so useless a thing, should be everywhere so esteemed, that even men for whom it was made and by whom it has its value, should yet be thought of less value than it is’.
It has limited industrial use. In its pure form of 24 carat, it is so malleable that it cannot be used for making any jewellery. It necessarily must be mixed with other metals and its cartage reduced to 22 or 18. Yet mankind at large and we Indians more specifically are obsessed with it. Every year more than 700 tonnes are imported licitly. Every year it is estimated that on an average the Directorate of Revenue Intelligence (DRI) and other enforcement agencies seize about 3 plus tonnes of gold attempted to be smuggled into the country — as per the DRI about 55% of the seizures are in cases coming through the land route and 36% through the air route.
The latest seizure by DRI of 14.6 kgs of gold concealed around the body of an actor operating through the Bengaluru airport again highlights the seriousness of the problem of gold smuggling. This was a potent cocktail of glamour and official protocol was being misused-and hopefully should bring an end to protocol being extended to the extent of security also being compromised.
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Smuggling or for that matter any evasion of taxes has a multiplier adverse impact on the economy. Apart from loss of revenue, it results in the generation of ‘black’ money which can be used for other nefarious, invariably criminal activities. In the case of smuggling some portion of the proceeds are also transferred to the country of origin — invariably through the hawala or trade based money laundering route.
So, what then is the solution to the problem of gold smuggling? We have come a long way from the days when all import of gold was prohibited. 1991 saw a change in policy and import permitted on payment of duty which has steadily been reducing.
The budget 2023-24 saw a reduction in the rate of duty of gold in the case of passengers returning after a stay beyond 6 months to 6%. A limit of 1 kg of gold has also been prescribed-in all other cases the rate of 36% is applied. Obviously, the difference in the price of gold between Dubai, the favoured place for purchase of gold by both smugglers and duty paying passengers, and India, and the 6% or 36% duty still makes smuggling a profitable option. It is estimated that a profit of up to ₹4 lakhs can be made on 1 kg of smuggled gold.
Also read: Gold rates surge amid tariff uncertainty, inflation data
Is there a case for a further reduction in the rate of duty — or blasphemous it may seem to even suggest, making import of gold duty free? Any such decision will have to be juxtaposed with the possible loss of revenue, the impact on foreign exchange (which presently is not an issue — our foreign exchange reserves are upward of US$ 700 billion), the damage which smuggling causes — and will have to take into consideration the fact that despite the best efforts of enforcement agencies what is seized is a small portion of what is smuggled.
As per the World Gold Council this quantity could be annually as high as 100 tonnes, an estimate not shared by specialised agencies like the DRI. The fact of the matter is that the seizures certainly do indicate that smuggling takes place and creates the attendant economic challenges. Making it duty free or lessening the duty will remove /reduce the arbitrage which presently fuels smuggling.
But this is a difficult policy call — and a decision which the government can possibly consider only if there is more than anecdotal data to suggest that the consequences of smuggling is far more serious than the revenue we will lose because of permitting duty free import of gold. Or should we at least consider reducing the basic customs duty to align it with the 3% GST rate? Either way it is time that we do seriously debate this issue.
Paradoxically smuggling continues to take place despite there being no real shortage of gold within the country. As per as 2018 NITI Aayog report as much as 23,000-24,000 tonnes of gold are lying unused in the vaults of banks, households and religious institutions. This quantity must have only increased since. All efforts by the Government, in the form of the Gold Monetisation Scheme (GMS), the Sovereign Gold Bond Scheme, Gold ETF to bring this gold in the open have come to naught.
Implicit in all these policy measures was that smuggling will come down if domestic demand could be met. This has not happened as the almost daily seizures of gold indicates. This has also been borne out by the World Gold Council which estimates that not more than 21 tonnes of gold were mobilised in the 8 years since the GMS was announced — a pittance when compared to what is available. An IIM Ahmedabad study has estimated that the schemes failed because of poor incentives.
Policy initiatives should continue to try and get the huge quantity of domestic gold into the market. A vigorous debate is required as to whether we need to further reduce the duty on gold such that the risks of smuggling will not be worth the effort. Enforcement agencies need to continue to maintain vigil. We need to constantly address the cultural affinity for gold, the single largest driver for the demand and smuggling. Actors who proudly endorse gold dealers should be roped in to highlight that the worth of a person is much more than the gold she or he wears.
— The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views expressed are personal.
Read his previous articles here