New Delhi: The Comptroller and Auditor General of India (CAG) has found that some Indian companies in the Gems and Jewellery sector, particularly one ‘N-Group’, has indulged in malpractice of mis-invoicing or over-invoicing, leading to a massive spike in the value of India’s pearl imports over the five year period ending in 2017-18.
Showing significant issues in the Gems and Jewellery sector, the CAG audit report found irregularities in 230 instances, which involved potential tax effects of ₹ 38,449.59 crore, having a probable revenue implication for the Income Tax Department from this sector alone. Out of 38,449.59 crore, 33 “significant issues” alone accounted for ₹ 37,909.38 crore of tax effect. Further, in 178 cases in five different states, the beneficiaries “had obtained bogus invoices aggregating to ₹ 2,477.73 crore”.
The report said that three companies associated with the N-Group did not file income tax returns for two consecutive assessment years – 2018-19 and 2019-20. One of these companies had conducted “major” international transactions between 2015 and 2018, that were in contravention of the Income Tax Act. However, the income tax (IT) department failed to take any actions against the firm.
CAG said the delay in taking action against these companies has resulted in a “huge” revenue loss to the exchequer as the probability of recovering the outstanding demands now seems to be remote. But, the auditor could not quantify the losses.
The auditor recommended that the Revenue Department in the Ministry of Finance may consider examining the genuineness of import of pearls in India, in coordination with other government departments and agencies as the abnormal trends during five years between 2013 and 2018 indicated the possibility of round-tripping and mis-invoicing.
Unusual trends in India’s pearl trade
According to its report placed before the Parliament, the CAG has said, “India’s import of pearls during 2013-14 to 2017-18 was 3 to 10 times more than the average annual value of global pearl production”. However, it is worth noting that the price of importing any product is usually higher than the cost of producing it.
A rather unusual trend was noticed in the pearls trade in India between 2012 and 2014. In these two years, the exports of pearls from India saw a massive jump from $2 million to around $330 million. Similarly, the import of pearls to India jumped from $11 million in 2012 to $821 million in 2014.
Thereafter, while the exports have remained largely range-bound, imports of pearls till 2017-18 continued to witness huge growth, before falling sharply in the subsequent years.
The above multifold increase in the value of imports indicates a possible “trade mis-invoicing” and “round-tripping of funds”, which the CAG has flagged as a “critical concern” in respect of the gems and jewellery sector.
Trade mis-invoicing means misappropriation of invoice compared to the original quantity/value of a product. An additional cash can be transferred through misrepresenting the quantity or the price of a product. On the other hand, round-tripping involves buying or selling one’s own products in order to show pseudo-demand of the product.
Another evidence produced by CAG in its report refers to the choice of destination where the N-Group were importing pearls from. While Japan, China, and French Polynesia have been the major producers of pearls, the corporate house has relied heavily on countries like the United Arab Emirates (UAE), Hong Kong, and Thailand for their imports. But, the contribution of these countries in global pearl production has been “negligible”.
Just for perspective, Hong Kong saw a near 70-fold rise in exports of pearls to India from $ 6.35 million to $435.09 million in 2012-13, and by 2017-18 it was exporting $2,070 million worth of pearls to India, which is another 4.75 times increase in imports since 2012-13. But, this trend drastically fell in 2018-19 when Hong Kong’s export to India in terms of pearls fell by 99.5% compared to the exports a year before. A near similar trend could be seen with the UAE.
‘N-Group’ & linked companies conducted suspicious transaction
The government auditor highlighted that, in the aforementioned period, the majority of the pearl imports were done by a single corporate group, the N-Group. According to CAG, N-Group imported anywhere between 11.46 per cent to 84.3 per cent of the total pearls coming into India, in terms of quantity. While in value terms, the range is between 52.52 per cent to almost 98 per cent.
During the audit, the CAG suspected that there is a “distinct possibility” that imports of pearls in the five years ending March 2018 “may not be genuine”, and in fact, the pearls could have been used by hawala operators to launder money.
Citing an Enforcement Directorate (ED) investigation, the CAG report suggests that the N- Group allegedly controls 20 entities based out of Hong Kong and UAE in order to “facilitate layers and laundering of funds from Punjab National Bank (PNB), to camouflage the real intention and identity of beneficiaries of the funds siphoned off from PNB”.
“The transactions may involve over-invoicing and round-tripping of imports,” the report said.
An FATF (Financial Action Task Force) report from October 2013 had also indicated that “most of the hybrid hawala transactions were routed through major international destinations such as Dubai (UAE)”, according to the CAG report.
The I-T department had provided a list of five importing entities which belong to N Group. Most of the import and export of pearl and pearls studded jewellery made by these five entities were related to the same N- group in Hong Kong and UAE.
In some of the cases, exports were made to the same parties from whom the pearls were imported. In other cases, exports were made to related parties but all transactions were in UAE and Hong Kong.
While saying that “there was a significantly high risk that imports and exports of pearls/ pearl jewellery were not genuine”, CAG notes that all the imports and exports of pearls and pearl jewellery were made from a single port viz “Special Economic Zone, Gujarat.” The report added, “The audit noticed issues indicative of weak monitoring mechanisms in the ITD with respect to the Gems and Jewellery sector.”
(Edited by Siddarth Muralidharan)