Organised jewellery chains hope the 2020-21 Union Budget to be presented on February 1 will rectify the taxing anomalies that have benefited illegal players at the expense of genuine traders.

Increase in customs duty to 12.5 per cent (from 10 per cent) last year has put them at a disadvantage vis-a-vis the illegal trade, said MP Ahammed, Chairman, Malabar Gold and Diamonds, a leading Kerala-based chain, and General Secretary, Kerala Jewellers Federation.

Per capita spending highest

Kerala accounts for the maximum per capita expenditure on gold -- Rs 208.55 in rural areas and Rs 189.55 in the urban areas and leads other big spenders Goa, Karnataka, Himachal Pradesh, Tamil Nadu, Jammu & Kashmir and Punjab. After the import duty was revised upwards, the price of gold has gone up by 20 per cent, which has led to a de-growth in business across the country over the previous year. There have been instances in Kerala where small and unorganised jewellery stores have sourced gold from smugglers and sold to consumers at a discount of Rs 150 to Rs 200 per gram, boosting smuggling of gold into the State.

Apart from the customs duty, the legal trade also has to pay a GST at three per cent, which means the landed cost of the yellow metal goes up to 15.50 per cent, Ahammed said. The legal trade parts with around Rs 5,000 more than the smugglers for every eight gram sold.

The hike in customs duty was intended to curb imports, but it has also brought down the legitimate business. Besides, it has incentivised the smugglers as is evident from the spurt in gold seizures in recent times. In 2018-19, 166.961 kg worth Rs 52.46 crore was seized from the Kochi airport alone, in comparison to 81.69 kg of gold worth Rs 23.69 crore in 2017-18.

Demand likely to be subdued

Meanwhile, analyst firm ICRA expects gold jewellery demand may remain subdued in 2020-21 with growth in the range of six to eight per cent even as imports in 2019 were the lowest in three years. Total imports fell 12 per cent compared to 2018.

Gold demand in India in the first half of 2019 was 372.2 tonnes, nine per cent higher than the first half of 2018, despite a slowing economy. Official gold imports in December declined to 39 tonnes from 152 tonnes in November 2019. But a deeper analysis reveals that sales have not actually been impacted. This means that large quantities of the yellow metal have been finding its way to the market.

Arrivals from destinations such as Malaysia and South Korea too have perked up, thanks to free trade agreements with those countries. Authorities are tracking incidents of smuggling from new destinations such as China, Taiwan and Hong Kong, other than the usual smuggling hubs Nepal, Dubai, Sharjah and other Gulf countries.

Tracking of trade to boost transparency

Ahammed is of the view that revising the customs duty downward to around four per cent or so will not only help end the arbitrage that the illegal trade enjoys currently but also may redirect more of gold trade through legitimate channels, boosting customs/tax revenue.

The widening gap of rate with the illegal trade has been a matter of concern for the organised trade for quite some time. He also emphasised the sourcing and tracking of the gold right until it is delivered to the customer. This would ensure transparency in the trade. He requested the Finance Minister to keep these issues in perspective while formulating the Budget proposals.

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