GOLD TRADE

In the wake of the demonetisation of high denomination currencies from November 8 midnight, apprehensions abound that possession of gold jewellery by individuals or households beyond the permissible limit as provided in the Income Tax Act rules long ago would be revisited.

The fears got further fuelled when search and seizure by the Income Tax department officials across the country showed up not only mounds of such old currencies that were no longer legal tender, but also pots of new series of high value ones and bars of gold.

The latest one such relates to a money laundering racket in Chennai which the tax sleuths busted by impounding Rs 120 crore in demonetised notes, new currency and gold on December 8.

Passengers coming from overseas too bring in gold on the sly with the latest haul reported of smuggled gold biscuits packed in the diapers of babies coming from Dubai.

Information provided by the Minister of State for Finance, Santosh Kumar Gangwar, in the Lok Sabha on November 18 in a written reply show that the quantity of gold seized from smugglers amounted to a massive 400 kgs valued at Rs 122 crore.

Even before demonetisation, import of gold in the country witnessed a sudden jump from August 2016 at 25.73 tonne to 99.62 tonne in October 2016, as gold always fascinated people to hoard for uncertain times like the ones we now have in hand.

What caught the authorities by surprise is that since demonetisation of high value notes on November 8, the tax evaders are deploying unorthodox ways to legalise their unreported holdings.

Such obviously devious routes range from colluding with gold jewellers for purchase of stuff with back-dated bills to deploying money launderers to change the old notes into new ones for a modest (and sometimes not so modest) fees, even persuading the poor to deposit the money into their no-frills Jan Dhan accounts for a paltry commission.

In order to caution the authorities to forearm themselves before these nefarious practices get deeper roots to defeat the aims behind demonetisation, reports also surfaced from the country’s financial hub, Mumbai, that jewellers in the country sold as much as 15 tonnes of gold ornaments and bars worth a humungous Rs 5,000 crore on the intervening night of November 8 and 9, after the government demonetised Rs 500 and
Rs 1,000 currencies.

The national secretary of the Mumbai-based India Bullion and Jewellers Association (IBJA) Surendra Mehta went on record, saying that nearly half of these 15 tonnes sales in a few hours took place in Delhi, Uttar Pradesh and Punjab, claiming that “only 1,000 of around six lakh jewellers across the country had accepted the demonetised currencies in exchange for gold on the night of November 8”.

What Mehta averted to was only a tip of the iceberg of such a clandestine Gold Rush, if I may be pardoned calling into the fore of the Chaplin movie on avarice, as most of the jewellers kept their shop doors open even after midnight on November 8 across the nation, catching in the process unwittingly the eagle-eyed watch of the tax authorities.

It is small wonder that such illegal trading activities on demonetised currencies and other means to convert defunct notes and black-money piles into legal channels prompted the Modi Sarkar to introduce and pass the Taxation Laws (Second Amendment) in the Lok Sabha sans discussion in the much-derailed winter session.

The intention is to compel the evaders to come forward and gratuitously declare their unaccounted income to get tax and penalty amounting to 50 per cent of undeclared income instead of using b(l)ack-channels to legalise their bizarre booty.

The legislation, once into the statute books after the passage in Rajya Sabha before long, proposes to enhance the applicable tax rate from the extant 30 to 60 per cent plus surcharge of 25 per cent and cess.

But rumours flew wildly that all gold jewellery, including ancestral jewellery would be taxed at 75 per cent plus cess with a further levy of concealment penalty of 10 per cent of tax payable.

This made the Finance Ministry to clarify that tax rate under this section is proposed to be increased only for unexplained, income as tax evaders might take recourse to incorporate their undisclosed income into the return of income as business income or income from other sources.

It further clarified that the jewellery/gold purchased out of disclosed income or out of exempted income like agricultural income or out of reasonable household savings or legally inherited, which has been acquired out of explained sources, is not chargeable under the extant or the proposed amended provisions.

In the same clarification, as this article noted in the early part, the government also made a reference to instruction No. 1916 that married woman, unmarried woman and men can hold up to 500grams, 250 grams and 100 grams respectively of undeclared gold, setting a ceiling of gold holdings on a household.

But officials might exercise their discretion in certain cases where individuals are not able to explain their ancestral or inherited gold. It is this discretionary power delegated to tax authorities that set the cat among the pigeons, with ordinary people fearing raids on their relatively moderate gold holdings—both earned and inherited—by wayward taxmen on some flimsy or whimsical pretexts.

This fear is not quite unfounded, because the Central Board of Direct Taxes (CBDT) on November 16, in its usual periodic notification of rule changes, said that Rule 12 E of the Income Tax Act, 1961, now is altered to mean that “the prescribed authority under sub-section (2) of Section 143 shall be an income tax authority, not below the rank of an income tax officer.

It needs to be noted that Section 143 of the IT Act covers under-reporting of income or what is officially described as the scrutiny section.

Previously, cases under this section were randomly picked up by a computerised system or needed the nod of the Income Tax Commissioner. It now accords this power to the lowest of the official in the tax department which might sway them to use their discretionary power in a whimsical or vengeful fashion.

The discretionary power so cleverly dovetailed into the rules means people not in possession of records for the gold holdings over and above the prescribed norm per household consisting of a married woman, an unmarried daughter and a male member would have to pay penalty once their house is searched on suspicion by the income tax officer.

In a way, the bureaucrats who have been held in leash after the advent of the Modi Sarkar from making money through discretionary powers now stand to gain because the tax authorities can do so with impunity if they want to rake in the moolahs.

This is the genuine grouse of many an honest family, and of those who have traditionally been keeping gold from their ancestors down the generations. It would not be feasible for such households to show records or legacy documents, as these were gifted by parents to their children down the generations.

This needs to be viewed against the latest India Wealth Report by Karvy Private Wealth, a private wealth management firm based in Mumbai. A study by Karvy said India’s individual wealth in physical assets stood at Rs 132 lakh crore, having grown 10.32 per cent in the fiscal year 2015-16, compared to a two per cent decline in the previous fiscal, 2014-15, the first year of the Modi Sarkar. Interestingly, gold accounted for 50 per cent share among physical assets, followed by real estate at 42 per cent and diamonds the rest.

S K Jindal
Spokesperson
Indian Bullion and Jewellers Association Ltd

You were on record that some members in the association had brought a bad name to the industry by keeping the doors of their shops open between the intervening period of November 8 to 9 to enable more people to purchase gold jewellery using the old high-value notes. What action has the Association taken against errant elements?

The law of the Land will take its on course.

In recent days the sleuths of the income tax department had recovered hoards of gold and cash in their operations. Does it not reflect that gold is still used as a safe haven for pocketing profits in troubled times?

Gold has always been, it is today also and will always be a safe haven, as this property of gold cannot be separated from it.

How are your Association sensitising members that genuine purchase of gold ornaments and jewellery do not suffer any jolt because of the ban on old high value notes?

Our association is always working for the promotion of gold and jewellery business in the larger interest of all its stakeholders including importers, wholesalers, manufactures, artisans, customers, investors within the framework of the economic policies of our government.

What is the outlook for the industry as the outcome of the demonetisation of high-value currencies is getting increasingly pronounced in the post-demonetisation phase?

Our outlook for the industry is very positive as the outcome of demonetisation. This will increase our efficiency and competitiveness.

With gold holdings of individuals constituting close to half of the individual wealth in the country, the authorities had been trying to wean people away from the proverbial proclivity of keeping the yellow metal which is an inert asset.

In a bid to cut down the country’s costly dependence on the imported gold and to meet the domestic demand for gold jewellery industry, which is employment and export-oriented ‑ and to reduce the insatiable demand for physical gold ‑ the Government launched Sovereign Gold Bond Scheme and Gold Monetisation Scheme in 2015.

According to latest official estimates, till mid-November, 2016, a total of 5,730 kilograms of gold has been mobilised under the gold monetisation scheme and from the six tranches of Sovereign Gold Bonds issued, a total of 14,071 kgs of gold units amounting to Rs 4,127 crore have been subscribed.

The government also held out lucrative spurs to rope in more people under these schemes through tax exemptions such as deposit certificates issued under Gold Monetisation Scheme, 2015, which are excluded from the definition of capital assets and are exempt from capital gains tax.

Interest income on deposit certificates issued under the Gold Monetisation Scheme is also exempt from income-tax effective from April 1, 2016.

What the government obtained by the moral suasion means to discourage people from holding gold in physical possession is peanuts. Although no firm statistics exist about the quantum and value of gold in possession of public and with private gold loan lending companies, there are definite reports from knowledgeable domestic and overseas investment agencies that as much as 20,000 tonnes of gold is held by Indian households, trusts and various institutions!

This is conceded by the Minister of State for Revenue Arjun Ram Meghwal in the Lok Sabha on November 18 in response to a query.

Considering the massive quantity of gold kept in such safe keeping, it would be a herculean task to dissuade people from parting with their precious metals and any slightest alterations or tax implications on their personal hoard might rattle them as if a hornet’s nest is disturbed.

With inputs from Pramod K Sharma