PremiumKidnapping, torture, murder, unreported — indeed, unreportable — larceny, and gang warfare. The list sounds like the ingredients of a standard gangster movie but, in reality, describes growing criminality in northern Kerala, where gold smugglers see their contraband being stolen by a new breed of bad actors, who spot the couriers employed by the smugglers, and proceed to follow, waylay and rob them. If the couriers resist, they are killed. A series of such incidents have been reported in recent times.
At the root of this violence is the Union government’s fiscal policy, specifically, of levying a steep duty of 15% on gold imports. On top of this, retail buyers bear a Goods and Service Tax of 3%.
Customs duty of 12% plus a cess of 3% make the price difference between duty-paid imported gold and smuggled gold well worth a huge criminal enterprise that suborns officials posted at airports, tempts unemployed young men into a life of crime and presumed easy money and often spawns violence. The smugglers do not report loss of property to the police. The gangs, who prey on the smugglers and fight with the smugglers and amongst themselves, also do not complain to the police: they choose to settle their scores on their own. The police, however, have to pick up the bodies that keep dropping dead along the trail of the couriers of contraband gold, those who prey on them and the smugglers’ agents who deliver their goods to jewellers.
One of the benefits of liberalization was the end of gold smuggling, as exchange rates became market determined, the hawala market lost its charm and gold imports saw nominal rates of duty. All that changed in January 2012, as the government revised the import duty on gold from ₹300 per 10 grammes to 2% ad valorem. This amounted to an increase in duty in absolute terms. The government kept on raising the import duty on gold, silver and other so-called non-essential items, to rein in a current account deficit that had reached 4.8% of GDP in 2012-13. In August of 2013, the import duty on gold and silver was raised to 10%.
This was subsequently brought down to 7.5%. But this July, the import duty was raised steeply to 12.5%, as the current account deficit looked to widen again amid depreciating rupee and rising global oil prices. An agriculture infrastructure and development cess was introduced in the 2021 Budget on imports of precious metals, alcohol and petroleum products, at varying levels on different products. The basic customs duty had been reduced while imposing the cess, so as to make no difference to the final price even after imposition of the cess. This essentially had the effect of diverting revenue from the pool of taxes that has to be shared with the states to a cess entirely at the disposal of the central government — customs duty proceeds are part of the divisible pool, but not cess proceeds.
The government’s attempt to ween Indians off the yellow metal have not succeeded. A gold bond scheme had been launched, which promised those who handed over their gold to the government, via authorised banks, and received bonds in return, the same quantity of virgin gold after a finite period of time plus a rate of interest. The idea was that this gold deposited with the government could be tapped to meet the demand of jewellers, so that imports of gold could be cut down. The scheme did not find much traction.
So, once again facing pressure on the current account, the government has resorted to an increase in the customs duty. An effective tax burden of 15% on the landed value of imported gold is to enhance the charm of smuggling to glittering levels. This must change.
The government could operate the gold bond scheme through jewellers, who enjoy the trust of customers, provided the jewellers, in turn, have the trust of the banks that have been given the responsibility to operate the gold bond scheme. The jewellers could follow standardized procedure and paperwork. But, more importantly, the government should cut the import duty on gold steeply to 1% or a maximum of 2%, and make smuggling entirely unviable. The import duty on gold in the EU is 2.5%. The GST rate on gold should also be cut to 1-2%, to encourage tax transparency and compliance.
Transparency in gold imports and sales would lead to transparency along the chain of value addition till the gold reaches the retail buyer. Legitimate transactions in gold would obviate the need to generate cash piles for purchasing gold, and generally help in combating black money.
Wiping out gold smuggling would have the ancillary benefit of reducing crime as well — at least in northern Kerala.