On August 8, the Comptroller and Auditor General of India (CAG) tabled a report [PDF] in the Lok Sabha in which it flagged critical concerns in the gems and jewellery sector. The report suggests that the import of pearls in India from financial years 2013-14 to the financial year 2018-19 was 3 to 10 times higher compared to the average annual value of global pearl production.
Further, there was a manifold increase in the rate at which pearls were imported into the country. The value of imports of pearls in India being much higher than the value of global production of pearls is indicative of trade mis-invoicing and round-tripping of funds which have been flagged as critical concerns in respect of Gems and Jewellery sector, as per reports.
India imported pearls mainly from Hong Kong, Thailand and UAE. Interestingly, the contribution of pearls to a global market for these three countries is negligible. CAG said in its report that the pearls were imported at the price higher by manifolds. The auditor mentioned that there were irregular trends in the growth of quantity and value of imports and exports of rough diamonds from 2010 to 2020. CAG recommended a detailed examination of the same.
Notably, India is the largest consumer of gold as well as the largest player in the field of diamond cutting and polishing. The gems and jewellery industry particularly in export is one of the fastest growing sectors in India. Because of the high value of transactions and foreign exchange involved in the sector, CAG pointed out there could be misuse and money laundering instances in the sector.
CAG’s Customs Receipt Audit Unit and Directorate of Revenue Intelligence (DRI) pointed towards the irregularities of large scale including round tripping of exports of machines and gold jewellery was manipulated to allegedly increase the turnover artificially to take status certificates and to enhance credit limits and financing from the banks.
The various irregularities that CAG mentioned include unexplained excess output, non-verification of claims made by the assessee and related parties, short according of stocks and more. In 33 notable incidents, CAG said the tax effect involved in the cases could round up to Rs 37,909.38 crores. CAG said, “Such irregularities had the underlying risk of tax evasion that require further probing and detailed examination.”
CAG further observed that the Income Tax Department allowed an aggregate deduction of Rs 115.45 crores under Section 10AA against a total export turnover of Rs 5,654.39 crores in seven out of 84 scrutiny cases. It happed even though the major part of the exports (Rs 3,878.95 crores) was outstanding for over six months. Revenue loss in these cases could be close to Rs 28.57 crores.
It further noticed that in 34 cases spread over 10 states, AO failed to consider the income under several provisions of the IT Act resulting in a total tax effect involved of approx Rs 58.86 crores.
While speaking about the discrepancies in the inventory, CAG said, “Audit observed that in 346 instances the assessees had not disclosed the quantitative details of inventory in ITRs and/or in Tax Audit Reports; in 362 instances, there was a mismatch in quantitative details as per the ITR vis-à-vis the disclosures through Tax Audit Report and in 330 cases there were discrepancies in Tax Audit Reports such as, incorrect carry forward of closing stock, mistakes in various disclosures required under the Income Tax Act.”
The recommendations from CAG to CBDT and ITD included revision of the format of the Tax Audit Report for grade-wise details necessary for the valuation of diamonds, Standard Operating Procedure (SOP) and standard guidelines entailing checks to be exercised during scrutiny assessment of Gems and Jewellery cases, capturing of details of exports and imports transactions undertaken with related parties, mandatory disclosure of PAN details of related parties for transactions beyond a certain threshold limit and more.
