(Repeats to fix formatting)
* The world's second-biggest gold importer imposed high duty
to curb imports
* Last year's rules have caused an explosion in gold
* New scam uncovered to smuggle gold in using tax-free zone
By Krishna N Das and A. Ananthalakshmi
NEW DELHI/SINGAPORE, Aug 1 India is scrambling
to crack down on a new gold smuggling tactic that it fears could
accelerate a flood of illegal imports of the precious metal into
the world's second-biggest buyer.
India - whose appetite for gold is only rivalled by China -
last year imposed a record 10 percent import duty and made it
mandatory to export a fifth of all bullion imports, seeking to
curb bullion demand that has blown out the trade deficit.
With the lure of big profits from avoiding duty, smugglers
have come up with innovative ways to bring in gold ranging from
swallowing nuggets to hiding bars in dead cows.
In the latest smuggling case, a gold exporting firm
attempted to use a tax-free special economic zone to try to
bypass restrictions and sell to the local market.
The scam was uncovered after police stopped a car trying to
take 25 gold bars, worth about $1 million, out of a tax-free
special economic zone in Surat in June to sell to the domestic
market, according to a government document seen by Reuters. The
owner of the firm was arrested.
The new government of Narendra Modi had been expected to
loosen the policies, but its first budget maintained the tough
stance, which has resulted in an explosion of gold smuggling and
cast doubt on how accurately official data reflects gold flows
in the world's second-biggest buyer.
Government figures show that only 2.34 tonnes of smuggled
gold was retrieved last year, while the World Gold Council
estimated 200-250 tonnes of gold illegally entering India.
"Since the import restrictions are still in place, smuggling
will remain rampant and that will distort total import
figures," said Carsten Fritsch, an analyst with Commerzbank AG.
The June arrest was the first time authorities had seized
gold being smuggled out of a special economic zone, according to
a government source, and appears to reveal a more sophisticated
scam to get gold into the local market.
"We had intelligence report and intercepted the car, with
the manager of the firm in it. The manager said the gold was
concealed by the proprietor of the firm," said another senior
government official with direct knowledge of the case, adding
that the gold was to be illegally sold in the domestic market.
"The authorities know that such things are happening and
intelligence gathering has been strengthened," the source said.
The ministry of commerce, which is in charge of special
economic zones, did not reply to requests for comment.
Illustrating the extent of smuggling, India's junior civil
aviation minister said this week staff of the national carrier,
Air India, had been found smuggling in gold in 13
instances in the last few years.
But special economic zones could be especially vulnerable
since exporters do not pay duty to bring gold into India, and
thus can make a huge profit by diverting supplies to the
domestic market. There are 185 such zones in India.
Last year's restrictions on imports have curbed supply and
pushed up domestic premiums - the difference between local and
global prices - to a record $160 an ounce last December.
Indian gold imports plunged by a fifth last year to 825
tonnes though jewellery and investment demand rose 13 percent.
One of the government sources said that others are likely to
be using special economic zones to bring in gold.
"After all how would you know if somebody is taking out gold
in their cars?"
To account for the disappearance of the gold, exporters are
likely to be using either fake receipts or imitation copper
jewellery, according to the official.
Some exporters also buy back supplies that they have sold
into the market when premiums fall, thus making a profit off the
premium arbitrage, said Sudheesh Nambiath, a senior analyst at
Thomson Reuters GFMS in Mumbai.
"Policymakers are increasingly aware of such practices. So I
wouldn't be surprised if we see further tightening of rules
around exporters in tax-free zones," said Nambiath.
(Additional reporting by Siddesh Mayenkar in Mumbai; Editing by