How the government will gain from the intervention of Tarrif in gold and petroleum products | Tech Reddy

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

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

Smuggling at the end of the day is a commercial activity. When there are demand and restrictions in any form, the supply will try to evade these restrictions to get an increased profit. All the elements were still there in respect of gold.

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

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

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

Undoubtedly, the merchandise trade deficit for April-May 2022 has increased. It was estimated at $44.69 billion versus $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 around 3-3.5 percent of GDP in FY23. Unprecedented FPI inflows (nearly $44 billion in the last 6 months) and widening CAD mean there is a strong likelihood that the Balance of Payments (BoP) will move into negative territory in FY23.

There is also an increase in gold imports in recent times – 107 tons were imported in May and imports in June are still significant.

It is against this background that the customs duty has been increased in the hope that it will reduce the stress on CAD. The duty was increased to 12.5 percent. The 2.5 percent agricultural development cess continues-in effect doing the duty on gold 15 percent. It is a moot point whether imports will be reduced as a result, or whether this will further encourage smuggling.

The gold price of 10 gm 24 carat in Dubai in Indian rupees as on July 4 is Rs 51, 980. In India, it is Rs 52, 340. This price differential is accompanied by tax customs that give incentives for smuggling; which provides for arbitration.

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 encouraged to take the risk. With the approach of the festive season, there is a strong increase in demand and attempts to meet the demand through smuggling. According to the World Gold Council, the demand is likely to be in the region of about 850 tons. Enforcement agencies have their work cut out for them.

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

While the imposition of export duties is WTO compliant, it is rarely used. It is imposed to make goods available domestically, and discourage exports by making them more costly-ironically, as we are also planning to achieve an export target of around $800 billion by FY23. Petroleum products constitute a major part of our export basket – in 2020-21 India exported around 56,796 TMT of petroleum products.

According to reports, the export duties should generate around Rs 1 lakh crore. What this means is that the estimated loss of revenue due to the recent cuts in excise duty on petroleum products must be compounded.

The Government has in effect hit two birds with one shale oil product available for the domestic market and also reducing the loss through excise duty cuts. For good measure, the DGFT has also issued a notification.

The exporter of such petroleum products should 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 properly calibrated.

It will be interesting to watch the result of these two political interventions.

– Najib Shah is a former chairman of the Central Board of Indirect Taxes and Customs. The views expressed here are personal.