Has Finance Minister Nirmala Sitharaman nudged gold smugglers to take more risks?

Has Finance Minister Nirmala Sitharaman nudged gold smugglers to take more risks?
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Nobel laureate Richard Thaler's 'nudge' theory has been put to great use in Union Finance Minister Nirmala Sitharaman's maiden budget on Friday. There was a 'nudge' towards environment-friendly transport (tax relief for those opting for electric vehicles), and then a 'nudge' towards a less cash economy (tax penalty for those withdrawing more than Rs one crore from banks in a year).

But Sitharaman seems to have nudged people towards undesirable choices, too. The increase in the import duty on gold and other precious metals from 10 per cent to 12.5 per cent, it is feared, is smuggler-friendly. The smuggling of gold already is a flourishing activity in Kerala.

Heist as a way of life

For individuals it is clearly the most preferred way of bringing gold into the country. It is so routine an activity that it seems even normal. A senior DRI official said the records in the four airports in Kerala show that not a single person had officially imported gold to the state in the last six years. “In other words, no one has, on their own, declared to the customs that they had imported gold. Even genuine travellers, from doctors to the daily wagers, opt to evade duties on gold,” the official said.

Has Finance Minister Nirmala Sitharaman nudged gold smugglers to take more risks?
Advocate Biju and his wife Vineetha, who functioned as carriers in a gold smuggling case.

Directorate of Revenue Officials say that 500-600 kg of gold is sneaked into the state annually. The DRI manages to pounce on just about 10 per cent of this contraband. The rest seeps into the market unchecked. Such weak surveillance has long established gold smuggling as a relative risk-free enterprise, a sort of pirate haven.

Now, Sitharaman seems to have given the grey market players a better reason to hold on to, and even expand, their illegal trade.

Tantalising margins

Before July 5, when import duty was hiked, smuggled gold fetched a gross profit of Rs 4 lakh a kilogram. But the jewellers who buy the contraband will take it only after factoring in their margin. So Rs 75,000 to Rs one lakh will be taken out of the gross profit. Then, there are the airfares and the wages to be paid for the carriers.

After all of this is deducted, the net profit per kg for the smuggler works out to be around Rs 2 lakh to Rs 2.5 lakh. With the import duty on gold now upped to 12.5 per cent, the gross profit is expected to touch Rs 5 lakh a kg, and the net profit, after all expenses, would cross Rs 3 lakh a kg. All the more reason for even a reluctant freebooter to take the plunge.

Has Finance Minister Nirmala Sitharaman nudged gold smugglers to take more risks?

“The smuggler's profit is the duty he manages to evade,” the DRI official said. On the very day the finance minister pushed up the import duty on July 5, the price of 24 carat gold shot up from Rs 3,504 a gram in the morning to Rs 3,565 a gram by afternoon, or 35.65 lakh a kg. At the same time in Dubai, from where smugglers mostly source their gold, the price was Rs 3,100 a gram or Rs 31 lakh a kg. For a smuggler, because he does not have to pay the import duty or the 3 per cent GST, this is a gross profit of nearly Rs 5 lakh.

Smuggler's excuse

Since 2009, when the import duty on gold was made 9 per cent from a negligible one per cent, the Centre wanted imports discouraged at any cost. The argument is the Centre does not want the current account deficit to widen. Payment of gold has to be done in foreign exchange and so more imports of gold would mean a higher outflow of the country's forex reserves and therefore a yawning current account deficit.

The tools used to stifle gold imports - high customs duty and the restriction on imports - seem to have nudged smugglers to find a parallel way of routing gold to India. Only gold ornaments worth less than Rs one lakh (nothing more than a few grams) can be imported duty-free into India, that too only by women. For men, the duty-free limit is Rs 50,000. Beyond this, a passenger is allowed to carry only one kilogram of gold, for which the 12.5 per cent duty is charged. Anything over this will invite an import duty of 36.5 per cent.

What's more, the Central Board of Indirect Taxes and Customs (CBIC) revises the rate of 100 grams of gold for the country every fortnight. This is to ensure that the gold rate in the country always remains higher than the international price of gold. So the import duty has to be paid on the higher gold rate that the CBIC fixes.

'Gold cottages'

Given the huge barriers to import, it could come as a surprise that there is still legal trade in gold. “The 7,000-odd registered gold dealers in the state together have an annual turnover of around Rs 20,000 to 30,000 crore,” said S Abdul Nazar, the national director of All India Gem and Jewellery Domestic Council and the treasurer of All Kerala Gold and Silver Merchants' Association.

“But the trade in the grey market is massive, worth over Rs two lakh crore,” he said. According to Nazar, nothing could be more transparently pro-smuggler than the decision to hike the import duty on gold.

Most of these smuggled gold are taken straight to the illegal jewellery manufacturing units across the state, known in DRI circles as 'gold cottages'. The DRI has estimated that there are over 5,000 such cottages with highly advanced gold smelting and chain-making machines. Officially, it is said that there are only 67 such manufacturing units.

Gold zippers

It is also hard to detect smuggled gold. Not all gold comes in the form of bullion, which requires the complicity of customs officials to be taken out of the airport. (A senior customs superintendent was arrested last month for his involvement in a gold smuggling racket.) A substantial chunk of the smuggled gold are first converted into deceptive shapes so that they escape the notice of even upright officials. “They mostly come in the form of zippers and watch straps. They dull the colours of these zippers and straps to make it look like copper. You won't even suspect,” the DRI official said.

Powder gold and kamikaze carrier

It is also common to sneak in gold in powdered form. The powdered form will be mixed in a semi-solid chemical paste and then tied around the waist of women or within fake injury bandages around the ankles or wrist. “The gold powder made into a paste by the semi-solid chemical will not be spotted by a metal detector,” the DRI official said. A goldsmith can easily separate the gold powder from the chemical paste.

And whenever a carrier is apprehended, it would be naive to conjure up visions of heroic customs agents. It could be part of the heist plan. There are what DRI officials call 'Kamikaze' or 'suicide' carriers in the smuggling team. “When there is a large team of say five or six carriers in a single aircraft, the customs official who is part of the smuggling racket nabs the carrier who is designated as the 'kamikaze' carrier as part of a prior agreement. A big noise is made about this one catch and in the commotion the others escape,” the DRI official said.

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