The government in a surprise move initiated tariff measures on two very different commodities — gold and petroleum products. With respect to gold, there was a hike in the import duties while in the case of petroleum products special additional excise duty has been imposed on the export of petroleum crude, HSD, petrol, and aviation turbine fuel.

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Gold has been a sensitive commodity vulnerable to smuggling. Given our fascination bordering on obsession for the yellow metal, there has always been a high demand.

Our annual licit import is in the region of 650-700 tonnes. 2021 was an aberration with imports touching 1067 tonnes as per the Gem Jewellery Export Promotion Council. Further, the Reserve Bank of India (RBI) held 743.84 tonnes of gold at end of September 2021.

Also read: Gold prices today: Yellow metal gains as government hikes import duty

It may be recalled that as per Finance Minister Nirmala Sitharaman's Union Budget speech 2015-16 approximately 20,000 tonnes of gold was said to be available domestically — gold which was neither traded nor monetised. Despite the government’s best efforts this gold continues to languish in vaults. India’s foreign exchange reserves are at a healthy $590.58 billion as of mid-June 2022.

The impetus for the demand continues to be cultural. The price difference between Dubai the major source country, and Mumbai continues to make smuggling an attractive option.

Smuggling at the end of the day is a trading activity. When there is demand and restrictions in any form, supply will seek to evade these restrictions to garner increased profit. All the elements were always there in respect of gold.

Unsatiated demand, restrictions in the form of customs duty, multiple international airports and a very porous border with Bangladesh and Myanmar. There was a steady illegal flow.

Also read: UK joins US, Canada, Japan at G7 Summit to ban Russian gold imports

Thus, huge seizures of gold were made by the customs officials, with the Directorate of Revenue Intelligence (DRI) leading the charge. As per the PIB release of May 2022, DRI has in the fiscal year 2021-22 seized 833 kg of gold valued at over Rs 4-5 crore.

The NE region has been the most vulnerable with 208 kg being seized from that region. This is apart from seizures made in all the major airports by the Customs with 403 kgs in Mumbai airport being the highest. The point being made is that even when the basic customs duty was 7.5 percent, the profit available in smuggling gold more than made up for the risks.

Undoubtedly merchandise trade deficit for April-May 2022 has increased. It was estimated at $44.69 billion as against $21.82 billion in April-May 2021, which is an increase of 104.80 percent. The rupee has weakened considerably by 6 percent in the last 6 months.

The current account deficit (CAD) is likely to widen to about 3-3.5 percent of GDP in FY23. The unprecedented FPI outflows(nearly $44 billion in the last 6 months) and the CAD widening mean that there is a strong likelihood of the Balance of Payments(BoP) moving into negative territory in FY23.

There has also been a surge in imports of gold in recent times – 107 tonnes have been imported in May and the imports in June also are said to be significant.

It is in this backdrop that the customs duty has been increased in the hope that it will reduce the stress on CAD. The duty has been increased to 12.5 percent. The 2.5 percent agriculture development cess continues-in effect making the duty on gold 15 percent. It is a moot point if imports will reduce because of this-or this will further incentivise smuggling.

The price of 10 gm 24 carat gold in Dubai in Indian rupees as on July 4 is Rs 51, 980. In India, it is Rs 52, 340. It is this price differential coupled with the customs duty which gives the incentive for smuggling; which provides the arbitrage.

The challenge has always been to strike the right balance-impose a duty high enough to reduce profit and not so high that smugglers feel emboldened to take the risk. With the festive season approaching there is bound to be a surge in demand and attempts to cater to the demand through smuggling. As per the World Gold Council, the demand is likely to be in the region of about 850 tonnes. The enforcement agencies have their work cut out.

The second major policy intervention is the imposition of export duty on a range of petroleum products. Special additional excise duty of Rs 23,250 per tonne on petroleum crude, Rs 6 per litre on petrol and aviation turbine fuel respectively and Rs 13 per litre on diesel has been imposed.

While the imposition of export duties is WTO compliant it is resorted to rarely. It is imposed to make goods available domestically, and discourage exports by making them costlier-ironically since we also plan to achieve an export target of around $800 billion for FY23. Petroleum products constitute a major portion of our export basket — in 2020-21 India exported around 56,796 TMT of petroleum products.

As per reports, the export duties should generate about Rs 1 lakh crore. What this means is that the estimated loss of revenue because of the recent excise duty cuts on petroleum products should be made up.

The Government has in effect struck two birds with one stone-making petroleum products available for the domestic market and also reducing the loss because of the excise duty cuts. For good measure, the DGFT has also issued a notification.

The exporter of such petroleum products will be expected to declare that 50 percent of the quantity mentioned in the shipping bill has been /will be supplied in the domestic market during the current FY. This should be a short-term measure and carefully calibrated.

It will be interesting to watch the outcome of these two policy interventions.

— Najib Shah is a former chairman of the Central Board of Indirect Taxes & Customs. Views expressed here are personal.

Read his other columns here

(Edited by : Ajay Vaishnav)

First Published:Jul 7, 2022 2:57 PM IST