The customs officials have seized 1,197.7 kg of smuggled gold in the April-June quarter, an increase of 23.2% compared with the same period a year ago, a government official said on Monday. The illegal trade could rise further in coming months as India, the world’s second-biggest gold consumer, raised an import tax on gold by 2.5 percentage points to 12.5% in July’s federal budget, effectively increasing smugglers’ margins.

The duty difference has been encouraging people to smuggle in gold from the Middle-East, an official with the Directorate of Revenue Intelligence (DRI), who declined to be named, said. Gold smuggling has also boosted illegal forex transactions used to finance smuggled gold, the official said. Gold smuggling has been rife since 2013 when India raised import duties on the metal to 10% in an effort to curb demand to reduce the country’s current account deficit.

Grey market operators - businesses that smuggle gold from overseas and sell it for cash to avoid the duties - got a further boost in 2017 when India imposed a 3% sales tax on bullion. In 2018/19 fiscal year that ended on March 31, customs officials seized 4,058 kg (4 tonnes) of gold, up from seizures of 3,223.3 kg a year ago and 429.17 kg in 2012/13, the DRI official said.

"Grey market operators usually sell gold at discounts to prevailing market prices as they evade paying the 15.5% tax, denting business of banks and bullion dealers", said Harshad Ajmera, a gold wholesaler in Kolkata, referring to the import tax plus the sales tax.

The World Gold Council has said up to 95 tonnes of gold was smuggled into India in 2018, although India’s Association of Gold Refineries and Mints and other industry bodies put the figure at more than twice that.