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EDITOR's KEYBOARD - FROM ARCHIVE

If Switzerland is tax haven, India is becoming gold smugglers haven!
By Shailendra Kumar, Founder Editor (Jan 24, 2013)
Nov 16, 2020

SO, here comes the 'Golden Era' for the gold smuggling syndicates, hibernating for a long time, or experimenting with many Information and Communication Technology products for a premium. With the Ministry of Finance notifying a 50% import duty hike besides an increase in the Central Excise duty, for the oft-repeated objective to reduce Current Account Deficit (CAD), whether it would really help blunt the fangs of deficit is certainly not certain but what is certain is that smuggling of the yellow metal would simply take a giant leap in the coming months. Only a couple of days back, the Chennai DRI sleuths stumbled upon a new modus operandi - smuggling through courier. And the consignment was worth Rs 3.8 crore. The sender was unknown and so was the recipient. But the precious consignment, which was air-routed to India, used to disappear even before reaching the Customs area. Given the fact that it takes time to collect actionable intelligence, one can safely presume that only after five or six such consignments must have escaped undetected, the seventh one was caught. If such a modus operandi was tried at Chennai airport, the senders must be trying the same through various other airports. And by the time the internal alert circular reaches more than a dozen international airports, a close to 100 such courier consignments must have paved its way into the jewellery market in India. Mind it, this is when the Customs is not aware of it. If some of the Customs officials get involved in 'true facilitation of the trade' there is no way the Ministry of Finance can even guesstimate the quantum of illegal trade in gold coming into the country.

In simple words, our policy makers are destined to witness interesting and innovative cat and mice game between the Customs and the gold syndicates. In Bollywood style, some of our intelligence sleuths would be shadowing the agents of smuggling syndicates and may be cracking down when their consignments land in India either concealed in genuine machinery imports or electronic goods or other consumer goods. One should take a lesson from the case booked by the Mumbai DRI, which had, based on intelligence, found the precious metal stored in imported hydraulic pumps. In other words, it is going to be a battle of wits and improvised modus operandi . This is besides the methods resorted to by carriers hired by such syndicates. Netizens are aware that on an average each international airport Customs has been making seizure of gold coins, gold bars and jewellery worth a few crores per week. A sudden spurt in its illegal trading appears to be being matched by smuggling of foreign currency out of India. Since funds generated out of sales of such consignments must reach outbound destinations abroad, a good number of sleepy foreign currency carriers have become active, and they have been using not only the air and sea routes but also land routes.

But going by the sheer size of volume involved in the illegal trade, it may be presumed that the entire finance is certainly not being managed through the hawala or outright smuggling of FC. If a clue is picked up from various international studies, the deposits in the vaults of Swiss Banks, owned by Indians, have significantly gone down. A part of such fund-withdrawals is believed to be being utilised for funding the purchase of gold bricks in Dubai, and the same being smuggled into India. A few international trade experts are also believed to be assisting the core strategists of the illegal trade, and thus, they have been making use of some of Free Trade Agreements (FTAs) and Preferential Trade Agreements. For instance, Indo-Thai FTA has been identified as the one being grossly abused for import of gold.

What is most surprising is the fact that although the Ministry of Finance is worried over the swelling CAD deficits and has also alerted the Ministry of Commerce about the abuse of value-addition norms laid down for import of gold items from Thailand but no change has hitherto been proposed in the FTA. Besides, there are at least six different export promotion schemes under which gold exporters have been importing gold today. And most of them have stinking chinks, which in turn make bigger holes in our forex kitty. But no step has been initiated to rationalise them or reduce the number of schemes to one or two. It is well known that a major chunk of such imports is diverted into the open market for local sale, and inferior quality jewellery is exported to meet the export obligations. The recent RBI Working Paper is an eye-opener for the policy makers provided they are keen to open their eyes to the stark truth about the DECLINING percentage of value-addition in the volume of jewellery being exported from India.

Let's now take a look at some more startling dimensions of this issue - If Switzerland is a tax haven, India is going to be a gold smugglers' haven. If another 'Dawood' emerges on the scene, the full credit may be accounted by the rising premium in the illegal trade of gold. Unlike the Dawood-days when the Customs, albeit ill-equipped, had daredevils like Daya Shankar and the powers to arrest them, today's Customs has no powers to arrest and will have to wait to see how many 'Daya Shankars' emerge on the scene! A huge legal tragedy struck the indirect tax administration when the Supreme Court of India in the case of Om Prakash Vs Union of India (2011-TIOL-95-SC-CX-LB) held that the offences under the Customs Act and the Central Excise Act are non-cognizable and also bailable. The Apex Court ruled that both Section 9A of the Central Excise Act and Section 104(4) of the Customs Act, 1962, provide that notwithstanding anything in the Code of Criminal Procedure, offences under both the Acts would be non-cognizable. And if the person arrested opts for bail, he has to be released on bail as per the provisions of the Acts (See Bail under Customs and Central Excise: Is 'Bee sting' of Indirect Tax Administration really gone?).

With the Gold Control Act gone, and the Customs being fully disarmed with its biting teeth, no prize to be given to guess - how a smuggler is to be treated if caught by the DRI or any other Customs field formation? No doubt, the Customs has detected huge consignments of gold illegally imported through containers or in baggage, and has also arrested the smugglers or carriers but the offenders have been let off as the law makes such offences non-cognizable and also bailable. This is so when even pick-pocketing is not a bailable offence.

In this backdrop, since Mr Chidambaram has taken a well-calculated risk to give an impetus to gold smuggling, he is also required to take a similar risk of again arming the Customs officers with the power to arrest in case of certain class of offences. As suggested in this Column earlier, the CBEC may categorise the offences under Customs and Central Excise and make them bailable and non-bailable in certain cases like outright gold smuggling and clandestine removal of goods or abuse of Cenvat Credit. This has become a dire need of the hour, and the CBEC Chairman and the Member (Customs) need to revisit the last year Finance Bill proposal and fine-tune the same before they present the same to the Finance Minister for inserting them in the current year Finance Bill. To recall the history, even Mr Pranab Mukherjee was convinced of the need to arm the Customs with the power to arrest but his heart strangely went through a 'volte-face' or was ill-advised to drop the proposal at the time of seeking Lok Sabha nod. But given the horrifying spectre of unrestricted smuggling of gold, which is indeed being relished by the World Gold Council and the Swiss Bank selling gold, as legally or illegally, their favourite Indian market has been pushing their sales up, the Finance Minister will have to take his brethren in the House into confidence to once again revisit the legal provisions and 'gift' the power to arrest to the Customs to make a dent into smuggling of gold.

Although while speaking to the media persons, the Secretary, Department of Economic Affairs, sounded confident that the duty hike would dampen the rising demand for gold and thus would contain the CAD, the ground realities tend to project his optimism standing without legs. Even the Gold Deposit Scheme, which he appeared to be hugely banking on, may not produce the desired results in its present format. There is no tangible reason for any household to give away its gold reserves to any bank for a meagre interest benefits. The Finance Minister needs to make this scheme more attractive if he wants the scheme to be even reasonably successful unlike the 1999 episode. For instance, he may tax-exempt the interest earned on such deposits . To reach out to large number of households or opulent Hindu temples, the banks would be required to designate more branches under this scheme and a huge marketing campaign would be entailed to educate the families before they make up their minds to part with their most precious asset. This is also the right time to revisit the old proposal of 1992 when a Gold Bank was proposed to be created. Such a bank can be armed with the power to regulate and incentivise the gold deposits in the country. Similarly, it may be made mandatory for the jewellery exporters to source certain percentage of their import needs from the domestic banks operating Gold Deposit Schemes. This would rescue the banks from siting over piles of gold reserves and their working capital getting stuck in it. In a nutshell, unless many more parallel policy decisions are taken to develop innovative tools, merely hiking import duty would certainly not help the larger cause of reducing demand for gold in India, and in turn, containing the soaring CAD deficit graph.