Mumbai : Gold smuggling in India, the world's second-biggest consumer of the metal, is likely to rise during the country's peak holiday season as buyers try to avoid paying a new sales tax and to dodge new transparency rules.

In August, India moved to include gold sales under the Prevention of Money Laundering Act (PMLA). The law makes it mandatory for jewellers to keep records of customers' personal identification numbers or tax code number for transactions above Rs 50,000.

Indian gold demand typically rises in the last three months of the year as consumer buy more for the wedding season as well as for festivals such as Diwali and Dussehra. "The government implemented the PMLA rule but it didn't take efforts to popularise. Customers are not aware of the rule and are hesitating in giving necessary details," said Surendra Mehta, secretary of the India Bullion and Jewellers Association. 

The tax avoidance recalls the unintended consequences of India's decision to raise import taxes on gold to 10 per cent by August 2013. The duty failed to curb demand but revived smuggling networks which, the World Gold Council estimates, imported 120 tonnes of gold in 2016, over one-fifth of total annual arrivals.

"The new rule is turning out to be counterproductive. Instead of giving required details, customers are buying without proper receipts to save tax," said Harshad Ajmera, the proprietor of JJ Gold House, a wholesaler in the eastern Indian city Kolkata.

The sales tax on gold rose to 3 per cent from 1.2 per cent as part of a new nationwide sales tax regime that started on July 1. "Jewellers are buying smuggled gold at discount in cash, then making jewellery and selling it to consumers without receipts," said Daman Prakash Rathod, director at wholesaler MNC Bullion in the southern city of Chennai.

In India, less than 4 per cent of the people pay income tax. Many tax evaders choose to park their illicit wealth in gold as it is nearly as liquid as currency in the country. The new limit of Rs 50,000 is too low and makes it mandatory to seek identification details of almost each customer, said Kumar Jain, vice president, Mumbai Jewellers Association.

"The rule has hurt sentiments. Usually demand improves ahead of Dussehra but this year demand is very weak," Jain said. Indians will celebrate Dussehra on September 30, a holiday when buying gold is considered auspicious.

By Rajendra Jadhav