As if slow demand is not enough, jewellers in India now have to deal with the close attention tax authorities are giving them. Image Credit: Reuters

New Delhi: Indian jewellers have received surprise tax notices asking them to turn over money they made from customers who scrambled to buy gold after Prime Minister Narendra Modi's 2016 ban on high-currency notes.

When Modi announced a sudden ban on 500 and 1,000 rupee bills on November 8, 2016 to weed out undeclared cash, clients thronged the store of one Mumbai-based jeweller, clamouring for necklaces, rings, bullion anything gold.

The jeweller - who asked to only be identified by his surname, Jain, to avoid retribution - said he sold his entire stock at a steep premium that day and pocketed revenue usually earned in two weeks. Three months ago, he received a tax notice asking for the source of those earnings and ordering him to turn in all revenue made that night, under suspicion that black money was behind the purchase.

Jain appealed against the order, but as per Indian law had to deposit 20 per cent of the disputed amount. "If we lose the case, then we have to close the business to pay the remaining amount," said Jain.

Three of eight jewellers interviewed by Reuters said authorities had demanded the full amount they made on November 8, 2016, while the others declined to share details.

There has been speculation the Indian government is turning its attention on gold holdings held by its citizens. India is the second biggest consumer of the metal after China. Image Credit: Reuters

One tax officer said the department was only levying a tax on sales of previously undisclosed stock. He added some jewellers were suspected of accepting the annulled notes after November 8 and backdating receipts to make it seem the purchases were made when the bills were still legal tender.

Casting tax net wide

About 15,000 Indian jewellers have been sent tax demands similar to Jain's, said Surendra Mehta, secretary of the India Bullion and Jewellers Association. Mehta estimated tax authorities are seeking around 500 billion rupees ($7 billion) from people in the gems and jewellery sector.

"This could create a problem for the industry in the long run as those who need to pay 20 per cent to appeal may have to purchase bullion or jewellery on credit," said Mehta. If they lose their cases, the jewellers could default on the loans, potentially hurting suppliers and bankers, he said.

Tax authorities are within rights to demand tax on past revenue, which takes time to scrutinise - but it is highly unusual for officials to demand the entire revenue as tax.

A tax official based in Kolkata, likened the exercise to "being asked to dig up a dead body after three years, find out how the person died and catch the killer." Two senior tax officials told Reuters the department has sent thousands of notices this year, including to jewellers, demanding an estimated 1.5-2 trillion rupees in taxes.

The move highlights Modi's push to shore up revenue as India's once-booming economy grows at roughly 11-year lows. India's corporate and income tax collection for the current year is likely to fall for the first time in at least two decades.

Target date
Officers are scrambling to at least partly meet the shortfall ahead of the end of the fiscal year on March 31.
New Delhi has also extended an amnesty scheme to settle disputes stuck in litigation to March-end. Authorities are also investigating maids and drivers, suspecting that their wealthy employers used them to hide undeclared funds after demonetization, officials told Reuters.
The push risks re-igniting complaints that New Delhi is being overbearing in its collection drive, an issue that was spotlighted when a prominent coffee magnate who committed suicide last year left behind a letter blaming persecution by tax officers.