According to the Global Trade Research Initiative (GTRI), India is seeking a review of its Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates (UAE) that should aim to remove tariff preferences on gold, silver, platinum and diamonds and align rules of origin.
The trade policy think tank said in its report that the main objective should be to examine how the surge in bullion imports from the UAE since the agreement came into force in May 2022 has distorted trade.
Starting with minor concessions, CEPA includes provisions for unlimited duty-free import of gold, silver, platinum and diamonds into India over the next few years. Under CEPA, silver from the UAE can be imported into India at 8% duty, provided there is 3% value added in the exporting country. This has led to a surge in silver imports from $29.2 million in 2022-23 to $1.74 billion in 2023-24. Currently, gold imports from Dubai attract a 5% duty, but this duty will be reduced to zero after three years if the alloy contains 2% platinum. In 2023-24, 119.35 tonnes of gold bars worth $7.62 billion were imported.
Multi-bagger SJVN sees 31% jump in Q1 net profit, up 8%
RVNL shares rise 4% on MSCI inclusion
GAIL rises 5% to 52-week high; brokerages maintain buy
ADB maintains India’s growth forecast at 7% for FY25
The recent budget addressed this issue to some extent by reducing customs duties on gold and silver from 15% to 6%, but this measure is time-limited. Customs duties on gold and silver from Dubai are set to be reduced to zero in the next few years, resulting in imports increasing again. The government felt that renegotiating CEPA and revoking these customs duty concessions was the only viable option.
“India should withdraw duty cuts on platinum, silver, diamond and gold jewellery and align value addition rules to remove margin from value added calculation in rules of origin. Ban conversion of more expensive products (silver bars) into cheaper products (silver grains) to avail CEPA benefits. Stop import of sanctioned metals from Russia via Dubai. Revoke privileges on GIFT City’s precious metals exchange for misuse,” said Ajay Srivastava, founder, GTRI.
According to the report, India has agreed to zero customs duty on unlimited platinum from Dubai, which is set to be reduced to zero by 2026 from the current 5%. This is a major concern for India as according to the World Customs Organization (WSO) classification rules, any metal containing 2% platinum will be classified as platinum. Some companies are taking advantage of this and are actually importing platinum that contains 98% gold. This loophole allows unlimited import of gold from Dubai at zero customs duty, leading to a significant reduction in customs revenue and a fall in foreign exchange reserves.
Under CEPA, customs duty on silver will be reduced to zero over a 10-year period starting from 2022. Reduction of customs duty on diamonds may also have a negative impact on the local industry. India imports rough diamonds, which are cut and polished domestically before being exported. To support the local industry, India imposes zero customs duty on rough diamonds and 5% customs duty on cut and polished diamonds. However, under the Indo-UAE CEPA, cut and polished diamonds can be imported at zero customs duty with just 6% value addition in Dubai. India’s global exports of cut and polished diamonds are worth $15.9 billion. Removal of the 5% customs duty will severely squeeze the profit margins of the domestic diamond industry. Indian manufacturers will struggle to compete with zero-tariff diamonds imported from Dubai, which may force many local businesses to close or relocate.
The review should also aim to eliminate the profit element from the calculation of value addition. To supply silver grains to India, Dubai companies import silver bars from Russia and other countries and convert them into grains, claiming 3.5% value addition in the process. Value addition occurring in this process is less than 0.5%. The remainder of the value addition can be legitimately shown as profit and can be laundered to show higher realisation.
The committee also asked the government to halt imports of sanctioned metals from Russia via Dubai, which it said violated US sanctions, and to revoke special privileges to the GIFT City precious metals exchange for misappropriation.Trading on the GIFT City exchange lacks transparency, raising “serious” concerns about pre-arrangements and invoice manipulation.