India is scrambling to crack down on a new gold smuggling tactic that it fears could accelerate a flood of illegal imports of the precious metal into the world's second-biggest buyer.
India - whose appetite for gold is only rivalled by China - last year imposed a record 10 percent import duty and made it mandatory to export a fifth of all bullion imports, seeking to curb bullion demand that has blown out the trade deficit.
With the lure of big profits from avoiding duty, smugglers have come up with innovative ways to bring in gold ranging from swallowing nuggets to hiding bars in dead cows.
In the latest smuggling case, a gold exporting firm attempted to use a tax-free special economic zone to try to bypass restrictions and sell to the local market.
The scam was uncovered after police stopped a car trying to take 25 gold bars, worth about $1 million, out of a tax-free special economic zone in Surat in June to sell to the domestic market, according to a government document seen by Reuters. The owner of the firm was arrested.
The new government of Narendra Modi had been expected to loosen the policies, but its first budget maintained the tough stance, which has resulted in an explosion of gold smuggling and cast doubt on how accurately official data reflects gold flows in the world's second-biggest buyer.
Government figures show that only 2.34 tonnes of smuggled gold was retrieved last year, while the World Gold Council estimated 200-250 tonnes of gold illegally entering India.
"Since the import restrictions are still in place, smuggling will remain rampant and that will distort total import figures," said Carsten Fritsch, an analyst with Commerzbank AG.
The June arrest was the first time authorities had seized gold being smuggled out of a special economic zone, according to a government source, and appears to reveal a more sophisticated scam to get gold into the local market.
"We had intelligence report and intercepted the car, with the manager of the firm in it. The manager said the gold was concealed by the proprietor of the firm," said another senior government official with direct knowledge of the case, adding that the gold was to be illegally sold in the domestic market.
"The authorities know that such things are happening and intelligence gathering has been strengthened," the source said.
The ministry of commerce, which is in charge