CAG highlights irregularities in gems & jewellery sector with underlying risk of tax evasion
The Comptroller & Auditor General of India has asked the CBDT to consider specifying a time limit for remittance of export proceeds by special economic zone (SEZ) Units for claiming deduction under section 10AA of the Income Tax Act.
It said that non-examination of suspicious business activities and short accounting of stocks in 33 significant issues involved tax effect of Rs 37,909.38 crore between FY13-FY18.
“Such irregularities had the underlying risk of tax evasion that require further probing and detailed examination,” CAG said in its Performance Audit on ‘Assessment of Assessees of Gems and Jewellery Sector’. It also said Standard Operating Procedure and standard guidelines entailing checks be exercised during scrutiny assessment of Gems and Jewellery to curb the “unscrupulous trade practices resorted by diamond traders/ manufacturers”.
As per the report, Audit observed in seven out of 84 scrutiny cases that Income Tax Department allowed aggregate deductions of Rs 115.45 crore under section 10AA against total export turnover of Rs 5,654.39 crore even though a major part of export proceeds (ranging from 40-100% of the total export turnover) amounting to Rs 3,878.95 crore was outstanding for more than six months.
“The potential revenue loss in these cases worked out to be Rs 28.57 crore,” CAG said.
Analysis of import and export figures of pearls revealed that though there was not much variation in export of pearl during FY13 to FY18, except 2012-13 and 2013-14, there was an abrupt rise in import of pearls during the said period followed by a sudden fall in import from FY19.
“Audit observed that India’s import of pearls during 2013-14 to 2017-18 was 3-10 times more than the average annual value of global pearl production,” CAG said, adding that there was manifold increase in the rate at which pearls were imported in the country.
The value of imports of pearls in India being much higher than the value of global production of pearls is indicative of trade mis-invoicing and round-tripping of funds which have been flagged as critical concerns in respect of Gems and Jewellery sector, CAG said in the report.
“The imports of pearls primarily being made from UAE, Hong Kong and Thailand, whose contribution in global pearl production was negligible,” it said.
It recommended the CBDT to consider selecting cases with significantly high imports and exports with negligible value addition as one of the criteria for detailed scrutiny as it observed from sampled cases checked in audit that the assessments were completed based on disclosures in the Tax Audit Reports and submission made by the assessee.
