The 22nd meeting of the GST [Goods and Services Tax] Council on October 6, 2017 was held in the backdrop of decline in the GDP [gross domestic product] during the first quarter of current fiscal to 5.7%, several glitches in the implementation of GST and subdued business sentiment across various industries especially the small and medium enterprises [SMEs] and exporters.
Even as the Council has sought to address the concerns of SMEs and exporters by substantially easing the compliance burden on the former and lessening the liquidity problems facing the latter under the GST dispensation, it has dropped a bombshell by doing a volte face on a path breaking decision it had taken only two months back in regard to know-your-customer [KYC] norms for jewellery purchases.
Taking a major step forward in Modi’s crusade against black money and considering that investment in jewellery is a major avenue for laundering it [as may also be seen from the sudden spurt in purchase in the follow up to demonetization announcement on November 8, 2016 and jewelers coming in droves to make huge deposit of the demonetized currency in banks], on August 23, 2017, the government amended the Prevention of Money Laundering Act [PMLA] making citation of PAN and Aadhaar mandatory for jewellery purchases beyond Rs 50,000 per transaction. The jewelers were also required to report data to Financial Intelligence Unit [FIU] in the finance ministry.
Further, any entity dealing in gems, jewellery and other high-value goods that has a turnover of Rs 2 crore or more in a financial year was brought under the purview of PMLA.
The intent behind these moves was to keep all high value transactions in this sector under strict monitoring and surveillance so that these can be linked to concerned persons. These expenses in turn, can be read in conjunction with their income profile and returns filed in the relevant financial year to bring out mismatch, if any. This is a foolproof mechanism for spotting unaccounted income and making such persons pay tax on the same.
Given that a big chunk of gem and jewellery business is cash driven [much of this coming from unaccounted sources], these requirements had the inevitable effect of triggering substantial decline in sales. During August and September, this was down by about 30-50 per cent. Together with decline in GDP growth during the first quarter of current year [on top of decline during the last quarter of 2016-17] this created some disquiet. Meanwhile, the gem and jewellery industry was also building pressure on the government to get the norms relaxed.
In a major reversal, the Council has raised the threshold for citation of PAN and Aadhaar under PMLA for gems and jewellery purchases from existing Rs 50,000/- per transaction 4-times to Rs 200,000/-. Consequently, data on such buyers – purchasing up to Rs 200,000/- need not be given to the FIU. Entities dealing in gems, jewellery and other high-value goods with turnover of Rs 2 crore or more will also not be covered under PMLA.
There is no doubt that the economy is going through a period of upheaval and associated pain for various sectors including the gem and jewellery industry. But, that is a short term pain. It pales in to insignificance when it comes to waging a war against corruption and black money which in Modi’s words is eating all our institutions of governance like termite, denying the exchequer the resources that are needed for accelerating growth and adequately funding social welfare schemes for the benefit of the poor.
This war needs to be successfully consummated for laying the foundations of a robust economy capable of growing in double digit on a sustained basis. This will be possible only if the government remains steadfast in its commitment and does not retract from the policies and regulations midstream. In the context of gem and jewellery industry, insistence on KYC norms for all high value transactions holds the key to reining in the launderers of black money.
Yet, if the Council has dispensed with the requirement thereby restoring the dispensation as it existed prior to August 23, 2017, this is a retrograde step. Letting purchase of Rs 200,000/- per transaction happen without citing PAN/Aadhaar number is the surest invitation to large-scale deployment of black cash in this sector. This can enable a person to consume crores in a year by making repeated purchases of Rs 200,000/- each. The aggregate figure for all persons could reach hundreds of thousands crores.
It may be argued that jeweler can be held accountable as under GST he/she is required to record all transactions and upload on GSTN network. How will that be helpful? In the absence of the identity of the person who made the purchase, it will be impossible for Income-Tax [IT] department to establish concealment of income. Forget that, the authorities won’t even be able to reach out to him as in the records, all such persons are ‘anonymous’.
This will be a big blow to Modi’s efforts to eliminate black money and seriously undermine the effectiveness of structural reforms such as demonetization, GST, bringing ‘transparency’ and ‘accountability’ in functioning of government/running businesses and putting an end to bureaucratic red tape. In the medium to long-run, India should forget about catapulting the economy on to a high/double-digit growth trajectory even as sufferings of the poor increase.
The reversals are completely out of sync with Modi’s style of governance. A possible argument that this is a decision taken by GST Council in which all states have to be taken on board is untenable. The issues relating to laundering of black money and IT come entirely under the jurisdiction of the union government whereas the Council deals only with taxation matters.
If, there is some other lingering compulsion that has forced the Team led by union finance minister to relent, then it is a serious blunder which must be corrected soon.