There’s been a recent, much reported surge in gold imports into India from South Korea since July 1st, when the Indian GST tax regime came into effect. Newspaper reports assert that gold imports from South Korea jumped to $339M during July 1-August 3 this year vs. imports of $470M in all of 2016-17.
In this post, I'll explain in detail how and why this has happened, while giving the reader some historical context as well.
The Backdrop
The Free Trade Agreement (FTA)
India has an FTA (Free Trade Agreement) with South Korea and other ASEAN nations due to which there is no basic customs duty on the import of gold from these countries. Note: A 10% basic customs duty is levied on gold imports into India from countries with which we do not have an FTA. The Indian government started levying this 10% import duty on gold in Aug 2013 when our Current Account Deficit (CAD) had reached sky-high levels and gold imports were soaring. The duty has stayed ever since.
While the duty and other measures taken in 2013/2014 helped bring down the CAD and stabilize our currency, a new unanticipated problem relating to the gold trade emerged.
Unintended Consequences of the FTA: Surging gold Imports taking advantage of the duty differential
The FTA with ASEAN meant that even after the imposition of the 10% import duty, gold imports from these nations were not subject to this basic customs duty. As a result, import of gold jewellery from these countries into India spiked due to the favourable duty differential vs. other nations.
For instance, gold jewellery imports form Indonesia suddenly spiked in Apr-June 2015 to Rs. 2,896 crore from Rs. 620 crore in all of 2014-15! Obviously something fishy was going on. Indonesia is a gold producer and gold jewellery from Indonesia accounted for ~50% of the overall unstudded gold jewellery imports into India 2014-15, but the sudden dramatic surge obviously meant that a third country was likely routing its jewellery shipment through Indonesia in order to take advantage of the low import duties on gold shipped to India. (link to source article in Business Standard)
This was obviously concerning for the Indian government since higher gold jewellery imports not only have ramifications for the Current Account Balance but also hurt domestic producers.
This is just one instance of misuse of an FTA leading to a surge of gold imports into India. There are many such instances from the past. The government needed a solution to plug such loophole.
The Government’s Solution: Imposition of Excise duty on domestic gold jewellers so that Countervailing duties could be imposed on gold Imports
In his 2015-16 budget, the Finance Minister levied a 1% excise duty on domestic gold jewellers with turnover over Rs. 12 crores. Note: This 1% excise duty was with Central VAT credit; without Central VAT credit, the duty would be 12.5%. Since these large jewellers would get credit for the VAT already paid on inputs etc., the effective excise duty for them would be just 1%.
However, since an excise duty was now being levied on domestic jewellers, this meant the government could now impose a 12.5% Countervailing Duty (same as the excise duty on gold sales without Central VAT credit) on imported gold jewellery. Countervailing duties are levied on imports in order to ensure a level playing field between domestic and foreign producers.
While the key reason the Finance Minister gave publicly for levying the excise duty was that gold is a luxury good and thus should come under excise duty purview (he also argued that this was a precursor to the GST), using this levy to protect domestic industry and a put a clamp on gold imports that utilized loopholes in FTAs was a key motive for the move as well. Gold traders/jewellers went on strike to oppose the levy but the government didn’t budge.
The Current Problem
The beginning of the GST regime meant Countervailing duty was no longer applicable
When GST became applicable from July 1, 2017, the 12.5% Countervailing duty levied on imports got subsumed under the GST. Per GST rates, gold imports now attract only 3% IGST (IGST = integrated GST which is shared between the central and the state government).
As a result, gold imports from South Korea (one of the countries with which India has an FTA) have surged because of this sudden fall in tax rate from 12.5% to 3%. As I mentioned above, gold imports from South Korea jumped to $339M during July 1-August 3 this year vs. imports of $470M in all of 2016-17. In July alone, ~10 tonnes of gold mainly in the form of coins and medallions was imported from South Korea as compared to 0 tonnes imported in July 2016. Per industry sources, these coins are then melted in India/converted into gold bars and used for the manufacture of gold jewellery.
FTA Violations
Besides the fact that this modus operandi takes advantage of a loophole, it is also in violation of FTA rules. Under the FTA, gold imported from South Korea has to be manufactured/refined in South Korea, in order for it to be eligible for the zero basic customs duty. According to bullionstar.com (link here), South Korea’s gold refining capacity is 60 tonnes/year. Of this capacity, for ~10 tonnes of gold to come to India in just one month (July), points clearly to violations.
Obviously, refined gold is being routed through South Korea from a third country in order to take advantage of the duty differential. It has been widely reported that per industry sources this refined gold is coming from Dubai. It is imported into South Korea in the form of gold bars or coins. If it is in the form of gold bars, then it is converted into gold coins in South Korea. Then it is incorrectly shown that the gold itself was manufactured (i.e. refined) in South Korea, and these gold coins get exported to India. These coins are then melted and used by gold traders/jewellers.
The other FTA violation involved in this modus operandi is that under the FTA, any gold coins imported into India have to be meant for sale to final consumers. They cannot be converted into gold bars and/or used to manufacture jewellery, in the way that traders/jewellers are doing right now.
What will the Indian Government do?
Good question. I wont speculate right now because the government will have to do something soon. I’ll dissect their action in a subsequent post.
No comments:
Post a Comment