Think tank suggests tariff tweaks to plug gaps in UAE CEPA

Withdrawing the tariff cuts on platinum, silver, diamonds, and gold jewelry is among the tweaks a trade think tank has suggested to plug gaps in the customs policy when the government renegotiates India’s comprehensive economic partnership agreement (CEPA) with the UAE.

India last week said it is in talks with the UAE to review the CEPA, especially on clauses related to value addition and reduction in customs duties.

The India-UAE CEPA, which was signed on 18 February 2022 and came into force on 1 May that year, contains provisions for unlimited imports of duty-free gold, silver, platinum, and diamonds into India over the next few years.

Concessional tariff imports of gold, silver, and gold jewelry from Dubai have soared since then.

In FY24, 119.35 tons of gold bars valued at $7.62 billion were imported under concessional tariffs from Dubai. Silver and gold jewelry imports from the UAE also soared, with silver increasing by 5,853% to $1.74 billion and gold jewelry by 290% to $1.35 billion.

To address this spike in imports of gold and silver at reduced duties, the government had cut duties on all imports of these metals from 15% to 6% in its budget on 23 July. The measure offered limited relief as tariffs on such imports from Dubai are expected to decline to zero in future, potentially increasing imports further.

The government also decided against reducing the import tariffs on gold and silver to zero for all trading partners under the Most Favored Nation (MFN) status to prevent a large increase in imports, which could have led to a substantial outflow of foreign currency reserves.

Under CEPA, India has agreed to reduce tariffs on platinum from Dubai to zero by 2026, a move that could lead to significant customs revenue losses, think tank Global Trade Research Initiative (GTRI) said.

The World Customs Organization’s classification rules allow metals with as little as 2% platinum to be classified as platinum. This loophole enables firms to import products that are predominantly gold at zero duty, thereby draining foreign exchange reserves, it said.

Under CEPA, India had agreed to eliminate silver tariffs to zero over 10 years starting in 2022, with the current concessional rate being 8%. To counter the temporary import surges from Dubai, MFN tariffs were reduced from 15% to 6% in the July budget.

GTRI has also advised revoking tariff eliminations on diamonds, citing significant damage to India’s $15.9 billion diamond export industry due to zero-duty imports of minimally processed diamonds from Dubai.
To support the local industry, India imposes zero duty on rough diamonds and a 5% duty on cut and polished diamonds. However, under the UAE CEPA, cut and polished diamonds can be imported at zero duty if they undergo just 6% value addition in Dubai.

Additionally, tariff concessions on gold jewelry are harming local manufacturers with a 290% increase in imports from the UAE as tariffs are scheduled to decrease from 20% to 15% over five years under CEPA, GTRI said.

The think tank has also proposed removal of the profit element from value addition calculations in silver granule imports.

“Most imports do not meet rules of origin conditions and hence do not qualify for concessions. To supply silver granules to India, Dubai firms import silver bars from Russia and other countries, convert them into granules, and claim a 3.5% value addition in this process,” GTRI said.

“Less than 0.5% value addition accrues in the process, while the rest of value addition can be legally shown as profit and money can be laundered to shown higher realizations,” it added.

Finally, GTRI has also suggested revoking privileges granted to GIFT City bullion exchange owing to misuse and lack of transparency, compounded by its low credibility among global bullion suppliers and domination by a few private bullion dealers influencing decisions.