To shore up revenues, taxmen dig up three-year-old demonetization cases

About 15,000 Indian jewellers have been sent tax demands; tax authorities are seeking around Rs 500 billion from people in the gems and jewellery sector

Indian jewellers have received surprise tax notices asking them to turn over money they made from customers who scrambled to buy gold after Prime Minister Narendra Modi's 2016 ban on high-currency notes, according to a dozen jewellers and tax officials.

When Modi announced a sudden ban on Rs 500 and Rs 1,000 bills on Nov. 8, 2016 to weed out undeclared cash, clients thronged the store of one Mumbai-based jeweller, clamouring for necklaces, rings, bullion - anything gold.

The jeweller - who asked to only be identified by his surname, Jain, to avoid retribution - said he sold his entire stock at a steep premium that day and pocketed revenue usually earned in two weeks.

Three months ago, he received a tax notice asking for the source of those earnings and ordering him to turn in all revenue made that night, under suspicion that black money was behind the purchase.

Jain appealed against the order, but as per Indian law had to deposit 20% of the disputed amount.

"If we lose the case, then we have to close the business to pay the remaining amount," said Jain.

About 15,000 Indian jewellers have been sent tax demands similar to Jain's, said Surendra Mehta, secretary of the India Bullion and Jewellers Association.

Mehta estimated tax authorities are seeking around Rs 500 billion ($7 billion) from people in the gems and jewellery sector.

"This could create a problem for the industry in the long run as those who need to pay 20% to appeal may have to purchase bullion or jewellery on credit," said Mehta. If they lose their cases, the jewellers could default on the loans, potentially hurting suppliers and bankers, he said.

Tax authorities are within rights to demand tax on past revenue, which takes time to scrutinize, but it is highly unusual for officials to demand the entire revenue as tax.

A tax official based in Kolkata, likened the exercise to "being asked to dig up a dead body after three years, find out how the person died and catch the killer."

Two senior tax officials told Reuters the department has sent thousands of notices this year, including to jewellers, demanding an estimated Rs 1.5-2 trillion in taxes.

The Central Board of Direct Taxation and the Finance Ministry did not immediately respond to a request for comment, and the government has not spoken about the tax demands on the jewellers.

The move highlights Modi's push to shore up revenue as India's once-booming economy grows at roughly 11-year lows. India's corporate and income tax collection for the current year is likely to fall for the first time in at least two decades, several senior tax officials have told Reuters.

SCRAMBLING TO FILL COFFERS

Officers, whose promotions and transfers hinge on meeting the government's annual tax targets, are scrambling to at least partly meet the shortfall ahead of the end of the fiscal year on March 31, a half-dozen tax officials said.

As part of its drive to beef up revenue, New Delhi has extended an amnesty scheme to settle disputes stuck in litigation to March-end. Authorities are also investigating maids and drivers, suspecting that their wealthy employers used them to hide undeclared funds after demonetization, officials told Reuters.

The push risks re-igniting complaints that New Delhi is being overbearing in its collection drive, an issue that was spotlighted when a prominent coffee magnate who committed suicide last year left behind a letter blaming persecution by tax officers.

Three of eight jewellers interviewed by Reuters said authorities had demanded the full amount they made on Nov. 8, 2016, while the others declined to share details.

One tax officer said the department was only levying a tax on sales of previously undisclosed stock. He added some jewellers were suspected of accepting the annulled notes after Nov. 8 and backdating receipts to make it seem the purchases were made when the bills were still legal tender.

Another Kolkata-based tax official said the department was likely to lose its cases against the jewellers.

"I know it is illogical... (But) at least the 20% will help add to collections this year," he said.