Why jewellers still prefer cash deals
Tue Jan 12 2021
The government’s recent move to bring all cash transactions
of ₹10 lakh and above in the purchase of gold, silver, diamonds, and
other precious stones under the ambit of the Prevention of Money Laundering Act
(PMLA), 2002, has made the industry jittery.
Though every cash transaction above ₹2 lakh is
supposed to be backed by Know Your Customer (KYC) documents, the government
agencies have been a little lax in implementing it. Under Section 269ST of the
Income Tax Act, 1961, which was introduced in the 2017 Budget, cash
transactions exceeding ₹2 lakh are prohibited.
To pacify the industry, the government has quickly 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 ₹10
lakh. Internationally, the limit is fixed at $15,000 or €15,000.
The department of revenue also clarified that any purchase
of gold, silver, jewellery or precious gems and stones below ₹2 lakh does
not require PAN or Aadhaar details of the customer.
India became a signatory to FATF more than 10 years ago, 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 industry had in fact failed due to
their political clout and connections,” said a private banker, who didn’t want
to be named.
As per the notification dated December 28, 2020, the
reporting agencies will report all cash transactions of ₹10 lakh or more,
either with a single transaction or more than one transaction during a month,
or news about jewellers carrying unaccounted stock with them, to the Financial
Intelligence Unit (FIU), under the Department of Revenue. FIU, the national
agency, is responsible for keeping a tab on all large money transactions,
including suspicious transaction reports pertaining to money laundering and
terrorism financing.
The government’s recent move to bring all cash
transactions of ₹10 lakh and above in the purchase of gold, silver,
diamonds, and other precious stones under the ambit of the Prevention of Money
Laundering Act (PMLA), 2002, has made the industry jittery.
If FIU finds any illegal /doubtful transactions, it can ask
jewellers for more information. Thereafter, if there is a prima facie case
against the jeweller, then the case may be referred to the Enforcement
Directorate (ED) for further investigation.
Though the revenue department has made a clarification,
jewellers 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
₹2 lakh. Even for the stock lying with jewellers, there should be
substantiated evidence with them for its ownership and possession.
If any unaccounted property or cash is found and it is
proved by FIU and ED after the probe that it is laundered (meaning its source
cannot be established), then the property or cash can be confiscated by the
authority and a case for investigation can be initiated. The ED can also
initiate a search and seizure operation. There is also a provision of
imprisonment which can vary from three years to seven years.
“Soon after bringing the gold jewellery sector within the
purview of PMLA, the ED has started sending circulars to all jewellers,” said
an industry official.
The puzzled managements of gold retail chains have asked
their employees and outlets to go strictly by the rulebook to avoid any
confusion. They are telling employees that not only the management but the
employees themselves would also be held responsible, leading to serious
consequences, including jail.
Rajesh Khosla, a consultant with MMTC-PAMP, a joint venture
that runs the largest BIS-certified refinery for gold and silver in India, says
the fresh message from the finance ministry is amply clear. “It tells jewellers
not to panic. India is part of FATF and the global rules have prescribed a
₹10-lakh limit for cash transactions. I do not see anything wrong in
bringing a regulation to stop the potential illegal activities in the industry.
If you deal in cash transactions above ₹10 lakh and do not do KYC, PMLA
will be applicable. Such regulations should not impact the business much,” says
Khosla.
Some senior industry officials Fortune India spoke to,
however, believe that the government’s efforts to tackle money laundering are
half-hearted. They say cash transactions up to ₹2 lakh without KYC
details will leave a potential loophole for jewellers.
“The government should make every transaction Aadhaar-based
and all high-value transactions should be supported by PAN. They should make it
mandatory to have Aadhaar/PAN details in every bill if the government wants to
really clean up the sector,” says Raghu G, general manager-bullion, Manappuram
Jewellers Ltd, a part of the Kerala-based Manappuram Group.
According to Raghu, rules should be made strict for purchase
of bullion by jewellers, and not just for sale of jewellery. He also believes
that it is important to keep a track of BIS hallmarking (in which the purity of
the metal is certified by the Bureau of Indian Standards, the national
standards organisation of India that the piece of jewellery conforms to a set
of standards).
“If a jeweller buys more hallmarked gold and reports a fewer
number of sales, it is a clear indication that the remaining sales were done
using cash,” says Raghu.
India is the world’s oldest and most extensive physical gold
market where gold consumption often approaches 1,000 tonnes per annum. While a
majority of demand is met by official imports (700 tonnes-850 tonnes), a
one-third of it (200 tonnes-250 tonnes) gets smuggled in through airports and
porous borders.
What is more, old gold (called `scrap metal' in industry
parlance) running into thousands of tonnes, is lying in the country. Apart from
households, temples and churches have a huge collection of old gold, mostly
donated by their devotees. Similarly, most goal loan companies sit on massive
quantities of old gold mortgaged by their defaulting customers.
According to industry officials, there is a serious issue
with the handling of old gold.
Every year, a part of this gold turns up for melting and is
used for fresh jewellery making. There is no tax levied on old gold. Most
jewelleries accept old gold without bills and make the payments in cash. People
prefer to deal in cash without bills because it otherwise attracts tax. The
gold retailers sell jewellery to customers without bills and accept cash. Such
transactions will go into `job-work accounting’ and the government will get
only 5% of the making charge as tax. This is substantially lower compared to
the 3% GST levied on the total price of the jewellery.
An industry official says jewellers would be forced to move
to job-work accounting en-masse. “This will lead to a major decline in the tax
kitty,” he says.
The 10% capital gains tax on gold is a major deterrent for
people to report their gold assets. “While selling old gold, if customers don’t
submit old invoices, the tax is calculated on the whole amount, and not just
the capital gain,” says Raghu. As per the rule, when you sell old gold for
anything more than ₹10,000, jewellers are supposed to make the payment
using RTGS or cheque. If it reflects in the bank savings account, one needs to
pay capital gains tax on the profit made.
An official from a leading gold retailer from Kerala says
mom-and-pop jewellers are facing a tough time since November 2016, when India
demonetised high-value currencies. “The lockdown and economic recession have
subsequently made it difficult for them to survive. This business is all about
turning over the stock and you need a lot of appetite to overcome such
disruptions. There is a clear consolidation of customers currently underway in
the country with the closure of small retail shops,” he says.
The new PMLA rule for the gold sector comes close on the
heels of a major gold smuggling case in Kerala. The case involved seizure of 30
kg of illegal 24-carat gold worth ₹14.8 crore in July 2020, by the
Central Board of Indirect Taxes and Customs at Thiruvananthapuram airport.
While gold smuggling through Indian airports and their seizure is nothing
surprising, this case took investigating agencies by surprise due to the
alleged links with the U.A.E. Consulate 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.
Industry officials say 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 channel expensive by 15.75%. If the
government keeps the customs duty high, we will continue to face the ill
effects of gold smuggling,” said one official.
The World Gold Council (WGC), which tracks wholesale gold
trade, had forecast gold consumption in India in 2020 to be around 700
tonnes-800 tonnes, compared to 690 tonnes imported in 2019. According to the
commerce ministry, imports in 2019-20 stood at $28 billion, 14% less than the
$33 billion imported in 2018-19.
The overbearing tax structure will continue to encourage
jewellers to make a beeline for cash deals, especially when the government
gives them an open loophole in the form of free cash transactions. Even if it’s
a ₹10-lakh bill, all they need to do is split the bill with five or six
fictitious names, say industry sources.
Source: https://www.fortuneindia.com