NEW DELHI: After successfully clamping down on gold imports to bring the runaway current account deficit under control, the government has set its sights on diamonds, precious and semiprecious stones, and precious metals, which it says are being round-tripped through dutyfree special economic zones (SEZs), with traders illegally creaming off the arbitrage.
The department of commerce says it has uncovered a racket that involves the diversion of gems and jewellery into the domestic market through SEZs, avoiding the import duty that's otherwise due on such items. The
SEZ route, meant to be used by importers for value addition and re-export, is being used a giant loophole, according to the government. India is a global hub for diamond polishing and ornament making and gems and jewellery account for a substantial portion of the country's exports.
The department of commerce, looking to ban jewellery imports through SEZs that are meant solely for the domestic market, wants to introduce stringent value-addition norms for the export of these products to ensure that the units are engaged in manufacturing and not earning arbitrage profits.
"These goods are making their way to the domestic market," said a government official aware of the development. "In many cases, rampant roundtripping is happening. There is a need for measures to ensure value addition." Diamonds worth about Rs 20,000 crore were imported by SEZ units between April and November, apart from precious stones worth Rs 4,500 crore and gold worth Rs 11,000 crore.
The government's move comes after a number of units in the Surat SEZ were found to be indulging in gold, pearl and diamond trading instead of manufacturing. Surat is India's main diamond-polishing centre.
In the case of gold, SEZ units breaking the law can earn arbitrage profits as high as 11.5% (10% Customs duty plus 1.5% excise duty). Diamonds attract a 2% import duty, which adds up to a substantial profit given the price of high-quality stones.
The commerce department has directed development commissioners of SEZs to conduct random checks of consignments of gems and jewellery units.
They have also been directed to examine transactions by the units in the past three years and take strict action if there's been any breach of rules and in cases of imported gold, diamonds and jewellery leaking into the domestic market.
Plans are afoot to install machines to test the purity of gold, diamond and platinum to check all exports and imports to ensure compliance with norms. The government had in April banned gold medallion manufacturing within SEZs and made 3-5% value addition mandatory on all gold exports in July.
Exporters said the move will help weed out those breaking the law. "It is highly essential to ban trading of gold, diamonds, pearls, precious, semi-precious stones and metals to plug loopholes.
Stringent value-addition norms will ensure manufacturing in the zones," said Pankaj Parekh, vicechairman, Gems and Jewellery Export Promotion Council.
Parekh pointed out that the SEZs were created to boost manufacturing and generate more employment and trading didn't serve that objective. The move by the government is to crack down on gold smuggling, which has seen an spurt in the wake of the import curbs.
Gems and jewellery exports declined 4.05% in the first seven months of the fiscal to $24.5 billion.
They still accounted for a 13.2% share of India's total export basket. India's current account deficit narrowed to 1.2% of gross domestic product in the second quarter of the fiscal against 5.9% in the first quarter thanks to the curbs on gold imports.
Source : economictimes.indiatimes.com