Modi's rule to curb unofficial gold trade backfires

India made it mandatory for customers to disclose their tax code, or Permanent Account Number (PAN), for purchases above Rs 200,000.

Try as it might, the Indian government appears to be unable to curb the country's love for gold.

Its latest attempt - a rule forcing buyers of high-value jewellery to disclose their tax code - has boosted unofficial trading in the world's second-biggest gold consumer, industry experts say, rather than promote transparency and dent demand.

If the rule does fail, gold inflows will continue unabated in India, flying in the face of Prime Minister Narendra Modi's efforts to curb costly imports and stop the metal from being used to hide billions of dollars of undeclared "black money".

India made it mandatory for customers to disclose their tax code, or Permanent Account Number (PAN), for purchases above Rs 200,000 ($2,948.44) from January 1.

This was done to track larger deals and deter the hundreds of millions of Indians outside the tax net from buying gold to keep their wealth out of sight of the authorities.

But jewellers and dealers say the opposite has happened.

"Some jewellers (are) moving to unofficial trade from official," said Mayank Khemka, managing director of jeweller Khemka Group of Cos.

"No one wants to lose customers just because they don't have a PAN card".

To skirt the rule, jewellers and buyers are issuing many small invoices and informal receipts.

"Most large buyers are not interested in giving PAN card details. Instead they ask us to split the bill under the names of the husband and wife or make purchases in instalments," said Mangesh Devi, a jeweller in the western state of Maharashtra.

"Most of my customers are farmers and some have genuine problems. They don't have PAN cards," Devi said.

Two-thirds of India's gold demand comes from rural areas, where jewellery is a traditional store of wealth.

India, home to 1.25 billion people, has only 223 million PAN card holders.

India's finance ministry said some gold buyers had been making purchases with informal receipts even before the implementation of the latest rule.

"This might have risen, but this violates various laws. Both buyers and sellers can be prosecuted," a ministry official told Reuters.

PAN OR NO PAN, INDIANS WILL BUY 

This is a reminder that regulations can have unintended consequences, as happened after India raised import taxes on gold to 10 percent in a series of hikes to August 2013.

The duty failed to curb demand but revived smuggling networks which, the World Gold Council estimates, imported 175 tonnes of gold in 2014, nearly a fifth of total annual arrivals.

"The new rule is boosting unofficial trade and it is making it easier to bring smuggled gold into circulation," a Mumbai-based dealer with a private bank said.

In India, just 3 percent 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.

"Gold is bought for almost every occasion, for weddings, birth ceremonies and festivals. The government cannot deprive 1 billion people from buying gold just because they don't have a PAN card," said Harshad Ajmera, proprietor of JJ Gold House, a wholesaler in the east Indian city of Kolkata.

"Ultimately it will create new problems."