The introduction of mandatory checks for Permanent Account Numbers (PAN) in India could hurt gold demand in the world’s largest consumer of the metal.
In the last budget, Indian finance minister Arun Jaitley announced plans to introduce checks on purchases exceeding 100,000 rupees to improve tax compliance within the country – consumers would be required to present a PAN card upon the purchase of any asset above that value.
But this could hit domestic gold demand by at least 10 percent because many in the country, particularly in rural areas, do not possess a PAN card, Metals Focus’ Chirag Sheth told FastMarkets.
“There will be an immediate impact on Indian demand – a 10-percent immediate effect but possibly more depending on how the jewellers can deal with it,” he said.
Only 20 percent of the population owns a legitimate PAN card, according to some estimates.
The legislation aims to tackle India’s growing money laundering problem – the country has made many attempts to cut off the circulation of illegal money in the form of gold.
“[But it] could damage an industry which is about more than just gold – it’s intrinsically linked to the culture,” another source agreed.
The policy, which was supposed to be introduced on June 1, has run into strong opposition particularly from the All India Gems and Jewellery Trade Federation, which warned that the government’s planned gold monetisation scheme would be affected by making PAN numbers compulsory.
Jewellers were also up in arms earlier this year and threatened to go on strike. They claim that around 80 percent of the $122 billion industry comes from those in the agricultural sector and fear the impact on their business.
The domestic agricultural sector accounts for a large proportion of annual gold demand in India – farmers use gold as their primary store of wealth because they have limited access to the formal banking system.
For more than five years, Indian citizens have been required to present PAN numbers on any purchase of above 500,000 rupees. But many jewellers have reportedly avoided the rules by writing up several different receipts of below 500,000 rupees to make up the amount of a consumer’s purchase.
But under the new rules, should a buyer want to a purchase 1.5 million rupees of gold, the jeweller would have to write up 15 different receipts to avoid the customer presenting a PAN card – a move that would be both unlikely and highly illegal.
The suggested policy will encourage jewellers to perform all transactions on a cash basis, thereby encouraging more illegal activity, said a source who did not want to be named.
“People will simply no longer declare things – it incentivises cash transactions,” he said.
Though some industry bodies have suggested introducing incentives for credit card purchases, others said consumers may turn to smaller jewellery outlets that might turn a blind eye to the ruling.
But there may be some resistance to do so – Indian jewellery has suffered from under-caratages for some time, particularly from untrusted smaller outlets, despite attempts from authorities to remedy the situation through the establishment of the Bureau of Indian Standards (BIS).
Simultaneously, the country also announced a new gold deposit scheme, which aims to monetise domestic inventories of around 20,000 tonnes of the metal, thereby lowering annual imports of around 1,000 tonnes and easing the country’s current account deficit.
Still, previous incentive schemes have failed to garner the interest of Indian consumers.
India will also introduce a sovereign gold bond as an alternative to physical gold. The bonds carry a fixed interest rate and will be redeemable in cash pegged to the face value of gold at the time of maturity. Other than giving investors long exposure to gold, it also provides a fixed interest rate.
(Editing by Mark Shaw)
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