Leading Kerala jewellery chains like Malabar Gold, Bhima Jewellers and Josco Jewellers are worried that the high VAT of 5% imposed by the state can result in gold being sourced through the illegal route to evade taxes. There is also a likelihood of customers turning to neighbouring states where VAT is just 1% on gold.

Talking to ET, Asher O, MD (India operation), Malabar Gold and Diamonds, said: “Though gold smuggling is not a recent phenomenon, there has been a spurt in smuggling in the recent past which can be attributed to an increase in the rate of central and local taxes.Import duty is at 10%. Kerala gold traders have to pay 5% as VAT, 4% more than the rest of the country .This will encourage unscrupulous gold traders to opt for the illegal route."

Jewellers fear that the steep difference between gold prices in Kerala and neighbouring states would encourage customers to buy jewellery from neighbouring states. “While smuggling of gold is illegal and restrictive measures can be imposed to curb smuggling, buying gold jewellery from the neighbouring states is perfectly lawful and cannot be prevented," said Asher. India annually consumes around 800-850 tonnes of gold. Of this, 40% is consumed by south India. The average bridal consumption of gold in south India is 320 gm.

Though there is a compounding system of tax payment in Kerala, jewellers pointed out that during the first year of operation, the compounding benefit is not available.During the second year of operation, the jeweller needs to register a spec tacular growth in sales to collect VAT payable to the state.

Babu M Philip, executive director, Josco Jewellers, said high VAT gives way to an increase in unaccounted business. “We are waiting for the GST rate to be declared. While implementing GST, the central government should refer to the experience of Kerala in case of higher tax levy. High tax leads to tax evasion. The GST rate on gold should not cross 2%," he said. B Govindan, chairman, Bhima Jewellers, said that if the GST rate is fixed anywhere between 4-6%, then smuggling will increase further.

Making PAN card submission mandatory on purchase of gold jewellery worth Rs 2 lakh has further added to the woes of the organised players.

“There are illegal suppliers of gold who violate this provision and do not ask customers for PAN card details,“ the jewellers said.