Gold consumption in India
The World Gold Council (WGC), which tracks wholesale gold trade, had a forecast of gold consumption in India in 2020 to the extent of 700 tonnes-800 tonnes, compared to 690 tonnes imported in 2019. According to the Ministry of Commerce, imports in 2019-20 stood at $ 28 billion, 14% less than the $ 33 billion imported in 2018-19. It is well established fact that a huge amount of illegal gold is frequently smuggled into India. The 12.5% customs duty, 3% GST and a cess of 0.25% make gold imported through the official channel expensive by 15.75% which appears to be one of the reasons for gold smuggling in India. If the government keeps the customs duty high, the country will continue to face the ill effects of gold smuggling in future.
Background for change
1. A major gold smuggling case was reported in Kerala state. This case involved in seizure of 30 kilogram of illegal 24-carat gold worth Rs. 15 crores in July 2020, by the Central Board of Indirect Taxes and Customs at Thiruvananthapuram airport. Even though gold smuggling through Indian airports and latter on their seizure by ED is not new or surprising to Indians, but this case took investigating agencies by surprise due to the alleged links with the U.A.E. Consulate located in Kerala’s capital. Multiple central probe agencies such as NIA, CBI, ED and the Customs are investigating the case simultaneously to track the money trail. Therefore, the smuggling of gold appears to be the one of the key factors for notification in PML Act 2002 with regard to gold sector being brought under it’s ambit.
2. The price of the gold in the last one year jumped up from Rs 28000 to Rs. 51000 and there were news items that gold is likely to hit Rs 68000 in the next year and Rs 1 lakh in next five years. Due to Corona pandemic, the share market, mutual funds were not doing well across the world and investors thought it profitable to invest in gold. This attracted the scrupulous element across the world and Black money/Red money owners got invested through various channels into gold that made the Government of India to regulate the inflow in this investment and hence the amendment has been made.
3. Spurt in the price of gold has attracted many including blackmarketeers which paved the way for PMLA amendment. The following are the comparative figures of price of the gold which will focus light on state of a situation, as to why cash investment is made in gold.
|Year||Price (24 karat per 10 grams)||Year||Price (24 karat per 10 grams)|
What is the amendment made to PMLA ?
The Central government has decided to bring all cash transactions of Rs. ‘10 lakh and above’ in the purchase of gold, silver, diamonds, and other precious stones and all the transactions of Real estate agents having yearly transaction turnover exceeding Rs 20 lakhs under the ambit of the Prevention of Money Laundering Act (PMLA), 2002, which has made the jewelery industry and lobby of Real Estate agents jittery. Now every cash transaction above Rs. 2 lakh will have to be backed by Know Your Customer (KYC) documents, such as PAN card, Adhaar card or other documents for Identity and residence proof respectively. In the past, the government agencies were little bit lax in implementing these KYC norms but now they have come with a bang. These sectors also will have to adhere to the provisions of Section 269ST of the Income Tax Act, 1961, introduced in the 2017 Budget, wherein cash transactions exceeding Rs. 2 lakh are prohibited. This provision now will be strictly implemented and the change has been effective from 28th December 2020..
The amendment has FATF connection as well:
The Central government has clarified that the new circular issued on December 28, 2020, is a requirement of the global watchdog Financial Action Task Force (FATF), which has brought out international standards to combat money laundering and financing of terrorism. Under FATF, dealers in precious metals and stones (DPMS) need to carry out customer due-diligence when they conduct cash transactions above Rs. 10 lakh. Internationally, the limit is fixed at US $15,000 or Sterling € 15,000. India has become a signatory to FATF more than 10 years back, on June 25, 2010. Following the 9/11 terror attacks in the U.S., FATF assumed a critical role in combating terror financing. Globally, bullion and precious metals are already under the ambit of money laundering rules. Earlier efforts by the government to introduce and implement stringent regulations for the jewelery industry and real estate sector had in fact failed due to their political clout and connections.
The circular does not apply if the proceeds are below Rs 2 lakh.
The Department of Revenue Government of India, has clarified that any purchase/sale of gold, silver, jewelry or precious gems and stones below Rs. 2 lakh will not require PAN or Aadhaar details of the jewelry customer. The notification dated December 28, 2020, states that the reporting agencies i.e. jewelers will report all cash transactions of Rs. 10 lakh or more, either with a single transaction or more than one transaction during a month, or news about jewelers carrying unaccounted stock with them, to the Financial Intelligence Unit (FIU), under the Department of Revenue. FIU (Ind), the national agency, which is responsible for keeping a tab on all large money transactions, including suspicious transaction reports pertaining to money laundering and terrorism financing.
How FIU is expected to monitor ?
If FIU finds any illegal/doubtful transactions, it can ask concerned jewelers for more information. Thereafter, if there is a prima facie case against the jeweler, then the case may be referred to the Enforcement Directorate (ED) for further investigation. Though the revenue department has made a clarification, jewelers believe that it is prudent for them to keep a proper record with name and address of customers with their KYC details for every sale in cash above Rs. 2 lakh. Even for the stock lying with jewelers, it should be substantiated with adequate evidence to show its ownership and possession.
Actions and prosecution
If any unaccounted property or cash is found and it is proved by FIU and ED after the probe that it has laundered (meaning its source cannot be established), then the
(a) property or cash can be confiscated by the authority and
(b) a case for investigation can be initiated.
(c) The ED can also initiate a search and seizure operation.
(d) There is also a provision of imprisonment which can vary from three years to seven years.
Consequences/implications for default:
1. The ED has started sending circulars to all jewelers, soon after bringing the gold jewelery sector within the purview of PMLA as central government would like to tighten the noose on illegal transactions of jewelers.
2. Now eligible goldsmiths will have to upload ‘gold sale returns’ on monthly basis.
3. The puzzled managements of gold retail chains have cautioned their employees and outlets to go strictly by the rulebook to avoid any confusion.
4. Few jewelers have cautioned their employees that not only the management but the employees themselves would also be held responsible, leading to serious consequences, including jail.
5. The overbearing tax structure may continue to encourage jewelers to make a beeline for cash deals, especially when the government gives them an open loophole in the form of free cash transactions.
6. Even if it’s a Rs. 10-lakh bill, all they could to do is split the bill with five or six fictitious names, and complete the transaction.
7. Many believe that cash deals up to Rs. 2 lakh without KYC, leaves a loophole for jewellers and bullion dealers to exploit
8. While taking care of transactions below Rs 10 lakh, yet another category has been included on the same day in the PMLA predicate offences list and the category is ‘Real estate agents;’ who would now be monitored by authorities. It has been learnt that many gold smiths have been using real estate activity to circulate the black money generated through high value jewelery transactions and hence Enforcement Directorate is keeping close watch on these Real estate agents who now will be tracked through gold smiths cum builders and developers. The jewelery Industry has to remain cautious as they may loose ‘ease of doing business’, should they indulge into undesirable transactions prohibited through this amendment.
9. Real estate agents are the new entrants to PML Act 2002 the reason being most of their commission is being received in cash and thus there is no accountability towards paying legitimate taxes. All real estate agents are not covered the PML Act 2002 but only those whose yearly turnover exceeds Rs 20 lakhs. Now these real estate agents have to conform to the KYC norms for all transactions whenever cash has been received while carrying on this business or profession.