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.

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