New Delhi: Indian customs authorities probe every nook and cranny, even body cavities, to crack down on gold smugglers. But thanks to a bungled trade deal with the UAE, importers slipped in tonnes of gold right under their noses, disguised as platinum – legally.

Importers exploited a loophole in the trade agreement that allowed them to bring in gold cheaply as part of platinum alloy, bypassing the high import duty and restrictions on gold imports by private players.

The Reporters’ Collective has now estimated, based on data in public domain and internal government records, that this loophole has cost India a whopping Rs 1,700 crore in lost revenue since 2022, leaving the customs officials red-faced.

Platinum alloy worth around Rs 24,000 crore has been imported since May 2022, when the Comprehensive Economic Partnership Agreement with the UAE came into force, shows data. Internal records of tax authorities estimate that more than 90% of this is actually gold.

This is possible because the trade rule on platinum, written when platinum was substantially more expensive than gold, says that any alloy with 2% or more platinum by weight should be classified as a platinum alloy. 

So, due to the loophole in the deal that laid out a red carpet for platinum alloy, private traders could sneak in tonnes of gold disguised as platinum while having to pay lesser import duties on platinum alloy compared with that on gold. In the current fiscal year, until July 2024, import duty on platinum alloy stood at 8.15% as against the effective tax of 18.45% on gold.

Tax authorities have acknowledged in their internal records that the loophole continues to be exploited and they are helpless. After all, the trade agreement was approved by the Union cabinet headed by Prime Minister Narendra Modi.

They have said: “A surge in imports of platinum in alloy shows a strategy of importing gold disguised as platinum...This approach…circumvents the restrictions on gold imports and benefits from a substantial duty differential.”

The rise in platinum imports coincided with a temporary dip in gold imports right after the signing of the trade agreement, suggesting that the private traders were poised to exploit the loophole. Official scrutiny has shown that most private players importing platinum alloy today were previously only importing gold. This reaffirms the apprehension that gold is being brought in as platinum alloy.

While the government says it recently asked the UAE to review this loophole, platinum alloy worth over Rs 10,000 crore was imported in just two months before the Finance Minister announced lowering of duty on gold to partly close the loophole in her budget speech in July 2024. In the same month, the government hiked taxes applicable on platinum alloy imports from the UAE.

However, the government’s move is only a temporary fix because duty on platinum alloy will drop to zero by 2026 in accordance with the current terms of the trade agreement, making it alluring for traders to continue taking advantage of the duty difference between gold and platinum alloy while the exchequer bleeds.

Though analysts had warned that this tax loophole, created by the government in 2022, could be misused, this is for the first time, internal government data and assessments have shown that the loophole is being widely exploited to import gold—and that the government knew about it.

The Collective sent detailed queries to the Directorate General of Foreign Trade and the ministries of commerce and finance but hasn’t received any response. 

Gold Rush

Indians' love for gold is old. More than a metal for ornament, it’s a trusted safety net against instability, an investment against uncertain times, and a sacred emblem for millions of Hindus. This affinity has propelled India to the position of the world’s second-largest gold consumer and one of its top five importers.

But India digs up only a spattering of gold. Most of its gold is imported from international suppliers mainly using foreign currency. Only certain licensed banks and agencies are allowed to import, and sell the gold to local jewellers. Importers convert Indian rupees into foreign currency through currency exchange, drawing from the Reserve Bank of India's foreign reserves. When import surges, pressure rises on foreign exchange. To discourage gold imports, the government raises import duties.

The import duty on gold was last increased in 2022 to around 15% with an additional 3% GST, taking the effective import tax to 18%.

While on one hand the government raised taxes on gold to discourage imports, on the other, it failed to see the loophole it left – a line tucked away in the India-UAE trade agreement covering 10,000 goods and services – allowing traders to bypass the higher gold duties.

Fast Tracked Free Trade

In the Modi government’s first and second term, there was an assembly line of trade agreements with different nations and trade blocks. The Ministry of Commerce and Industry was in a hurry to seal one agreement after another –  some pending for years from previous governments due to disagreements – to meet the ambitious trade goals. Then commerce minister Piyush Goyal led much of the negotiation for the UAE trade deal, and wrapped up the agreement in a “record span” of 88 days.

The agreement essentially reduced or eliminated taxes on a mutually agreed list of goods and services that either country produces and exports to the other. One of them was platinum alloy.

Under the agreement, duties on platinum alloy that India imports from the Emirates were brought down to 12.5% to start with. This was six percentage points lower than the duty imposed on gold in 2022. The duty has to be further reduced over the years and eliminated by 2026. Platinum alloy import duty stood at 8.15% in July 2024 – over 10 percentage points less than the duty imposed for importing platinum from elsewhere.

How did this happen?

“Platinum alloy” was the magic word that opened the gates for importers to bring in tonnes of gold to India avoiding the higher taxes on gold.

An alloy is a substance that combines two or more metals, or a metal with non-metallic elements. So, one could theoretically have an alloy that contains 80% platinum by weight with the rest being copper. But trade norms take this to another level. A platinum alloy needs to have only 2% platinum by weight in it to be classified so.

This definition was set in 2007 when platinum prices were 50% higher than gold. However, by the time the Modi government rushed the trade deal with the UAE, platinum was worth half as much as gold and had low demand.

No one in the government, it seems, saw the loophole that the traders were all ready to pounce on to bypass restrictions on gold imports – by creating a mix of 98% gold and 2% platinum with the help of a UAE partner and labelling it as "platinum alloy."

Unlike gold, anyone could import platinum alloy to India without prior permission from either the RBI or the Directorate General of Foreign Trade. And they could do it at a huge discount because the duty on platinum alloy under UAE trade agreement in 2024 stood at 8.15% when official duty on gold was 18.45% – a difference of over 10 percentage points.

A difference of 10% percentage points might sound tiny but since gold is a high-value commodity, it was a bonanza for private traders who are banned from importing gold (except for certain government notified gold traders who after 2022 could import gold via the India International Bullion Exchange in Gift City Gujarat).

Surprisingly, gold traders were ready to exploit this loophole the moment the India-UAE agreement came into effect.

In the 27 months after the agreement came into force, platinum alloy worth Rs 24,000 crore was imported into India. This was an unprecedented jump because in the eight months preceding the agreement, only Rs 6.3 crore worth of platinum alloy had been imported into India.

Records show customs officials were aware importers used this backdoor route to bring in gold at lower duties.

They noted internally that, “gold is being mixed with platinum and other elements to form platinum alloy sheets containing gold more than 90% which are then again being separated through refining.”

On this basis, The Collective estimates that gold worth Rs 21,000 crore was imported via the loophole.

To estimate the gold duty importers avoided by bringing in platinum alloy from the UAE, The Collective used the government and other databases to track the increase in the import of platinum alloy from the UAE after the trade agreement was enforced in May 2022. Based on the customs authorities’ assessment that on an average 90% of the alloy is gold, The Collective applied the duty differential quoted by the authorities to estimate that importers have avoided paying Rs 1,700 crore in taxes since May 2022.

They also raised the concern that the loophole continues to be exploited by importers. Tax officials note that in the first seven months of the current financial year 2024-25, platinum alloy worth over Rs 1,500 crore was imported from the UAE. And these importers, they conclude, are into platinum trade only for the gold it hides.

Hidden Data, Private Players

The Collective requested export-import trade watchers to review the import data on platinum alloy for the past three years – from September 2021 to September 2024. They shared their assessment: Ten largest importers of platinum alloy are private gold traders and didn’t import platinum earlier. They were and are in the gold business.

The Collective can’t name all of them because the government has made it a criminal offence to publish details of who is importing and exporting different goods and at what price or volumes. But when trade details become part of a public record, especially if they are introduced as evidence in a court of law, journalists are legally allowed to report on it.

We have details of two companies that got snagged in a court case.

Customs authorities confiscated the platinum alloy being imported from the UAE by two prominent gold traders, MD Overseas and Ausil Corporation Private Limited, accusing them of breaking the custom laws and regulations. They were among the top importers of platinum alloy.

The Delhi High Court let them off saying even if their platinum alloy contained a high level of gold, it was all legit under the agreement the Indian government had signed with the UAE.

The court held that this practice could be curbed only by a policy change.

“Whether the apprehensions or reservations expressed warrant a review of the import regime, modulation of the terms of the Trade Agreement or merit an amendment to the list of eligible products are clearly issues which fall in the realm of policy,” the court stated.

In the years Delhi-based MD Overseas imported platinum alloy from the UAE, its revenue jumped by 74% in FY 2022-23 over the previous year, shows its financials.

A year after the UAE trade deal came into effect, MD Overseas reported earnings of over Rs 17,000 crore from gold sales in 2023-24, which is nearly double its earnings from the previous financial year. This jump in its gold sale earnings came even as its declared gold purchases in the year stood at Rs 69.3 crore – a decline of over Rs 1,000 crore from the gold purchases worth Rs 1,105 crore made in the previous financial year. The Collective could not independently verify if the gold sales are from the gold blended with platinum.

During the same period, the company earned Rs 9.2 crore from platinum sales. This marked the first time MD Overseas made platinum sales in at least two financial years, coinciding with the implementation of the free trade agreement with the UAE.

Another prominent importer of platinum, Gujarat-based Ausil Corporation Private Limited, too was a petitioner in the case against the customs authorities that had confiscated platinum alloy.

Ausil saw a whopping 10,094.9% jump in its revenue in FY 2022-23 (over previous financial year) when it began importing platinum alloy under the India-UAE trade agreement.

The Collective sent questions to the companies but hasn’t received any response. 

Even if analysts have warned of this potential tax avoidance, details of this dubious trade route that robs Indian exchequer of tax has remained unavailable.

The government publishes commodity-wise aggregate data of import and export but doesn’t give out granular details. In April 2022, it made it criminal for anyone, including journalists, to publish the granular details of who is importing and exporting different goods and at what price or volumes. They didn’t give a reason to justify the ban.

The ban came into effect just a month before the trade with UAE kicked off under the agreement.

While private players continue to buy and sell such data in the market from data aggregators, publishing it for public purposes by journalists is illegal. This limited The Collective’s ability to share such data that would reveal names of all the major private companies importing gold in the guise of platinum alloy.

Trade analysts have listed out several other private bullion traders who have used the loophole to import gold into India since the UAE-India agreement but The Collective is restrained by law from publishing the data.

Place of Origin

There could be more to the UAE-India agreement on platinum alloy than what meets the eye, authorities have assessed. UAE doesn’t have gold mines, however it is one of the biggest destinations for African gold, from where it is ultimately exported around the globe. 

The UAE-India agreement offers low import duties on platinum alloy which has either been produced in the UAE or gone through sufficient processing in the country. This requirement is called the value addition condition. For platinum alloy it was set rather low at 3% along with other jewellery and precious stones. 

It means if the importer could get a certificate from the UAE that at least 3% of the total value of the import had been added to platinum-gold mix in UAE they could route gold from any other part of the world under this cover. 

Customs authorities found many importers were getting away with just about meeting this benchmark. 

Government says it recently called for a review of the terms of the deal with UAE on the rules of origin on platinum. In parallel it did reduce import duties on gold to 6% in the recent budget.

But this could be a short-lived move. Under the agreement with UAE the duty on platinum-tinged gold has to be brought down to zero by 2026. So, these private players could continue bypassing the restrictions India imposes on importing gold and pay less duty on imports than those who bring in pure gold.‍