An astonishing surge in gold jewellery (GJ) exports from outside special economic zones (SEZ) at a time when the demand overseas is poor and the simultaneous plunge in the growth of shipments from SEZs since March 2013 has come under the government scanner.
The concern now is whether this 'unusual' rise in GJ exports from domestic tariff area (where normal taxes and duties are applicable unlike the SEZs, which are tax/duty-free enclaves) is genuine, according to official sources.
What is being looked at is the possible angle of exporters in DTA, especially the big exporters who are in the registered star trading house (STH) or premier trading house (PTH) category, over-invoicing GJ shipments and sending them to tax havens /low-tax nations or other destinations overseas to claim incentives (including duty-free import entitlements). The suspected methodology is that whatever exports done so are then brought back into the country after melting the same as gold input for further exports. Recurrent use of this method could allow the players to reap huge, undeserved profits.
The sources said the big exporters in the STH/PTH category also get the benefit of the RBI's 20/80 scheme (where nominated banks/agencies including some PSUs as well as STHs and PTHs can import gold provided they ensure that at least 20% of it is exported).
This, they said, is leading to these big exporters in the DTA “making a killing” by selling up to 80% of their gold imports domestically at a 6-8% premium (even after paying the 10% duty) as there is a shortage of the yellow metal in the local markets owing to the prevailing import restrictions.
SEZs, on the other hand, do not get any duty entitlement/refund benefits such as duty credit scrips for any exports as these are tax-free enclaves. They are allowed to import gold duty free only for exporting it entirely after the meeting the prescribed value addition norms.
GJ exports from DTA in 2013-14 grew year-on-year by a whopping 141.58% to $5.68 billion. However, such shipments from SEZs shrunk sharply by minus 66.28% to $5.36 billion in 2013-14 from a healthy $15.9 billion in 2012-13.
This trend continued in this fiscal too. GJ exports from DTA shot up by 130.61% y-o-y during April-May 2014 to $728.69 million, while such exports from SEZs contracted by minus 30.19% to $542.72 million in April-May 2014.
As against this curious trend, GJ exports from SEZs have always been performing better than such shipments from DTA. In 2012-13, GJ exports from SEZs clocked 9.55% growth over the previous year as against 5.06% growth by DTA GJ exports. The SEZ performance in 2011-12 was much better as against DTA with GJ exports from these enclaves recording a 35.3% growth year-on-year against just 4.64% growth by such exports from DTA. Similar was the trend in previous years too.
Last year, the government and the RBI had identified high gold imports as one of the main causes leading to widening of the current account deficit (CAD), and took steps, including hiking import duty on gold from 4% to 10% to curb its imports and contain CAD.
RBI norms in August 2013 said gold supply by nominated agencies to SEZ units, STH and PTH will not be treated as exports for the purpose of the 20/80 scheme.
In May 2013, the government had restricted gold trading from SEZs following complaints which alleged that some SEZs were diverting gold that is imported duty-free to the DTA and making huge profits due to the cost and duty arbitrage.
These factors meant that there was no real incentive for business persons to be in SEZs for exporting gold. As GJ exports from SEZs declined, the government in June 2013 said gold jewellery and ornaments can be exported from SEZs with a minimum value addition of 3%, while studded gold jewellery exports were allowed from these zones with a minimum value addition of 5%. Earlier, this value addition norm was applicable only to DTA units.