A special Diwali promotional SMS from the jeweller was a terse message about the new government decision: “Greetings from....Government has withdrawn the PMLA (Prevention of Money Laundering Act) notification no.4/2017 dt.23/08/17 on jewellery purchase. Aadhaar and ID as per this notification are no longer required for the purchase of above Rs 50,000. Also, please note GST on jewellery is only 3%. Happy Diwali.”

The leading jewellery brand, which has produced some of the best gold advertisements and award-winning TV commercials using a Dubai-based creative agency, obviously considers that this is possibly the best gold promotion for this Diwali!

Why not? Gold and property purchases have traditionally been the most effective means for money laundering and parking black money, especially through benami operations, but had attracted stringent ‘know your customer’ (KYC) conditions including PAN card or other ID proofs in recent times. The stringent provisions were introduced earlier this year, extending the application of PMLA to the gems and jewellery sector on suspicions of elements in the trade facilitating money laundering, especially after the controversial note ban of last year. As per the new rule, while the Income Tax Act allowed cash sales of up to Rs 2 lakh without KYC, the norms of PMLA restricted the sales in any format to Rs 50,000 without proof of PAN, Aadhaar or other IDs.

The move was, however, bitterly contested by the jewellery trade, which argued that it discriminated against 70 percent of rural buyers as they were not under the tax net and did not, therefore, have PAN cards. The trade also insisted that the gems and jewellery sector was not a source to attract black money since there is a value addition of 15-20 per cent in developing the products, and that rather bullion was the preferred segment for investment by black money holders.

Meanwhile, the widespread criticism and discontent over the general slowdown in the economy in the aftermath of demonetisation and the introduction of GST, which was backed by a series of data releases, including a much lower GDP growth rate of 5.7 percent for the previous quarter, forced the government to embark on a damage control mission. Accordingly, at the 22nd GST Council meeting last week, a number of modifications were announced to contain the negative impact of the poorly-implemented GST regime. As part of this, the GST notification on gems and jewellery was suspended and a new order issued stating that PAN card will no longer be mandatory on the purchase of jewellery for over Rs 50,000. Also, the government need not be informed on jewellery purchases of over Rs 50,000, which means that jewellers will not have to report data on buyers to the Financial Intelligence Unit.

Irrespective of the claims of the gems and jewellery trade that their products are not suited for parking black money, the relaxation could now open the floodgates for corruption and money laundering. Even with the stringent rules in place, jewellery traders have been found to indulge in several practices to dodge the system, including splitting of the transaction into smaller parcels so as to limit the value below the threshold level. Now, with the ID proof requirements off and no need to report transaction details to financial intelligence, it would be virtually a free run for unscrupulous traders to help money launderers.

It is no secret that raids by enforcement authorities invariably yield heavy caches of gold and jewellery, nailing the lie that black money hoarders do not use this asset class. The argument that the 15-25 percent additional making charges and other value additions may be valid for genuine investors, but for money launderers, it sill means 75 percent gain versus zero, as there is no perspiration ‘quotient’, so to say, in the value of their earning.

The compulsions of the Modi government in announcing the relief measures are understandable. The high political stakes in the coming assembly elections, particularly Gujarat, where it will be highly prestigious for BJP to win, may be worth any price for Narendra Modi and his NDA. The social media has even renamed GST as the ‘Gujarat Service Tax’ as a number of the announced relief measures will be particularly of help to exporters, and owners of small and medium enterprises in Gujarat. According to a media report, of the 27 broad categories of items that saw a reduction in GST rates, at least eight are in segments where Gujarat is a dominant player. Also, Gujarat has the largest concentration of the gems and jewellery trade.

Whatever may be Modi’s compulsions, the lowering of guard against black money is a cruel joke on the people of India, who were forced to make such heavy sacrifices, including some with their lives, for the success of demonetisation, which unfortunately was pre-destined to fail with no possibility of success whatsoever. (IPA Service)