The government is planning to ban the import of 24-carat gold jewellery, in a bid to reduce gold smuggling, duty evasion, misuse of free trade agreements (FTAs) with foreign countries.

The move follows a sharp decline of about 18% in the export of gems and jewellery (April-October), which contributed 15% of the total exports.

"We want 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," said Dr John Joseph, directorate general of export promotion, (a department under finance ministry).

The new proposal would allow only 18- and 22-carat gold so that it becomes difficult for importers to liquidate the stocks in local market and it will compel them to re-export the gold with value addition.

FTAs are meant to promote trade between two countries, wherein tariff and non-tariff concessions are extended on a reciprocal basis to the goods manufactured in the respective countries.

Currently, India has an FTA with the Association of Southeast Asian Nations (Asean).

According to official data, overall gold jewellery imports in the June quarter via FTA were worth Rs 3,145 crore against Rs 1,203 crore, the total imports in fiscal year 2015 ending March.

A steep rise in jewellery imports was noticed via Indonesia. In May, the import of gold jewellery increased to 6 tonnes against 400 kg in January this year.

Under FTA norms, the import duty on gold jewellery is 2% against 10% on raw gold and 15% on gold jewellery in the normal course. This means an 8% loss to the exchequer in terms of gold bars and 13% in the case of gold jewellery, which is approximately Rs 250 crore and Rs 400 crore, respectively, in just one quarter.

However, there is an additional condition of 35% value addition by an Asean member before a third-country product is exported to India. Value addition would be in the form of local manufacturing cost, designing etc. Besides this, the exporter should have the certificate of the origin country.

According to jewellers, it is easy to justify the value addition on gold jewellery. Rajiv Popley, director of Popley Jewellers, said: "The import of 24 carat jewellery can be easily used as raw material for production which competes with the norms of 10 % duty in the normal course. FTA is developed to encourage the manufacturing capacity of the respective countries. Hence, prohibiting 24-carat gold import might serve the purpose of such treaties."

Unexpected rise in gold jewellery imports through the FTA route has prompted the revenue intelligence department to probe the matter. According to sources, the Directorate of Revenue Intelligence (DRI) has already started the verification of the country of origin certificate. As they suspect that manufacturing of gold being done in the origin country itself but routed through FTA countries. However, nothing concrete has been established so far.

A senior finance ministry official told dna: "About 60% star trading and premier trading houses who are certified importers misuse FTAs and Special Economic Zones (SEZs) norms on a large scale. Even so, the more concerning part is the modus operandi adopted by these trading houses."

According to sources, 24-carat pure gold jewellery is being imported deliberately in the form of heavy chains and bangles, which could not be less than 5 kg. Then they are converted back to gold bars for further selling.

In most cases, it is found that the jewellery imported through this route is exported on paper by generating a fake invoice, so that duty drawback is being claimed. Meanwhile, imported jewellery is typically re-melted and sold in the local market.

Duty drawback seeks to give back all taxes on inputs used in the manufacture of goods which are exported. It operates on the principle that 'taxes and duties shall not be exported'.

However, such misuse is across export promotion schemes.

According to the DRI's annual report (2014-15), they have detected cases were it was found that SEZ importers had not exported even a single consignment and they had diverted precious metals in the local market and earned the arbitrage profits as high as 11.5% (10% customs duty plus 1.5% excise duty).

"There is mostly no manufacturing, either they are diverting gold to the local market or they are doing circular trading for money-laundering. There are tax havens running inside India. For instance, if you visit Surat SEZ, most units are running on paper," a senior custom official told dna.

The department has directed development commissioners of SEZs to conduct random checks of consignments of gems and jewellery units.

According to a PTI report, India imported over 528 tonnes of gold, worth Rs 1.12 lakh crore, in April-September this year. This is against 915 tonnes of gold, worth Rs 2.10 lakh crore, that was imported in 2014-15.