India's Gold Industry Split Over New PAN Rule

Necessary and not damaging, says IBJA. But will cut gold sales 20-30% and grow smuggling, says GJF...

INDIA'S gold industry is split over a new rule aimed at curbing "black money" and tax-dodging in the world's second-most populous country – a rule which some jewelers say risks denting demand and increasing smuggling into the world's No.1 gold consumer market.

Effective 1 January, the new rule forces consumers to provide their Permanent Account Number (PAN) for personal tax purposes when making transactions of Rs 2 lakh or more (200,000 Rupees, equal to just less than US$3,000 today), including buying jewelry or bullion.

That's down from the previous level of Rs 5 lakh (some US$7,500).

The lower threshold also applies to India's new Gold Monetisation Scheme, aimed at unlocking some of the sub-continent's estimated 20,000 tonnes of existing private holdings by collecting jewelry in return for a rate of interest, and refining it for sale to meet future demand.

Finally launched by Narendra Modi's BJP government last November, just before the peak gold-buying festival of Diwali – eight months after it was first announced in the 2015 Budget – the scheme aims to reduce the need for gold imports to India, now on track for an 11% annual rise to more more than 1,000 tonnes on one estimate.

The world's largest gold consumer nation in 2014 – and the heaviest gold-buying nation throughout history – India has zero domestic gold mining output today.

China, the No.2 private buyer, has been the world's top gold mining nation since 2007.

The lower PAN level is a "negative step for the industry," says trade group the All India Gems & Jewellery Federation (GJF), "as it will neutralise benefits arising out of the monetisation scheme, which is positive."

What's more, only 30% of Indian adults have a PAN card, said a GJF press release in December, with chairman Sreedhar G.V. putting the figure at just 12% today, and forecasting a 20-30% drop in business for 2016.

Because "most of the rural buyers are not under tax net and do not have PAN cards," Sreedhar said to The Economic Times last month, the new rule risks discriminating against the gold's industry's largest market. The GJF chairman says he also expects gold smuggling into India to rise from around 100 tonnes to "about 300 tonne" per year as a result of the change.

Wages in three-quarters of India's rural areas don't exceed Rs 5,000 per month (US$75), according to the country's latest Socio Economic and Caste Census (SECC).

As it is, says Sreedhar, traditional gold retailers "[are] not a source to attract black money, since there is a value addition of 15-20% in developing [jewelry] products while bullion is a preferred segment for investment by black money holders."

In contrast, the Indian Bullion & Jewellers Association (IBJA) said on Monday it backs the new lower PAN threshold, because "an economy growing without black money is good for future generations," according to its president Mohit Kamboj, a former electoral candidate for India's ruling BJP.

"The Permanent Account Number (PAN) provision is applicable even on medical services, and consumers must accept it," Kamboj told the Business Standard, addng that India's world-leading gold demand hasn't suffered since bullion import tariffs rose to 10% in 2013 in a bid to curb the country's large current account deficit.

Still, both the IBJA and the GJF are calling on the government to reduce the current 10% import duty on refined bullion, amongst other requests ahead of the 2016 Budget.

Last week the GJF also called for the Gold Monetisation Scheme to be administered through existing jewelry stores, rather than the hallmarking and refining factories still apparently completing the necessary paperwork – the same call then made this Monday by the IBJA.

Take-up of the Gold Monetisation Scheme by households and temples has to date been described as "lukewarm" and "paltry", with only half-a-kilo of jewelry collected during the scheme's first month across the entire nation of 880 million adults.

"If the government ropes in certified jewellers as collection and purity testing centres under the Gold Monetisation Scheme," the Times of India quoted the GJF, "it may help in collecting over 100 tonne of the yellow metal in the first year of the scheme."

Now the IBJA says it wants to set up 1,000 centers for promoting, collecting and testing gold from households and temple trusts, tapping its own network of member jewelers.

"These [jeweler-run centers] will on-the-spot assay the purity of the gold consumers want to deposit, and also accept gold," says IBJA president Kamboj, reportedly awaiting government approval of his proposal.

The IBJA also said in late December it is launching a physical bullion trading exchange to help formalise India's "unregulated" gold industry flows, and established the new World Silver Council, intended as "the market development organisation...provid[ing] industry leadership while stimulating demand" for the precious metal.

Already "dominating" silver trade flows in 2014 according to analysts Thomson Reuters GFMS, with imports growing 18% to a record 6,843 tonnes – over one-fifth of total global demand – India was on track in 2015 to show a further 13% rise to nearly 7,760 tonnes according to the IBJA, if not 9,000 as the World Silver Council says on its site.

Some 25-30% of India's current gold demand, meantime, comes from "consumers directly associated with farming and related sectors," says a report from specialist analysts Metals Focus – a number likely to fall thanks to "growing urbanisation and the increase in rural infrastructure."