Combatting Luxury Goods Smuggling

Note: The laws mentioned in the article applies to the Republic of India.

Smuggling is a massive global problem that affects every industry sector around the globe. India is no different, with widespread counterfeiting, piracy, and smuggling having serious economic, health and safety ramifications in the country. Small businesses buy smuggled items, whether purposefully or unwittingly, and incur unplanned costs in the form of breakage, company downtime, and unenforceable warranties.

The Customs Act of 1962 defines smuggling as “any act or omission that renders such commodities vulnerable to forfeiture under Sections 111 or 113 of said Act.” Basically, it is the illegal transfer of legally permissible commodities through a secret route.

For instance, an original Luxury Louis Vuitton bag, purchased in a low-tax country and unlawfully resold in a higher-tax country. Despite the fact that the prevalence and exact extent of commodities smuggling are unknown, the repercussions are ubiquitous. Smuggled goods at low prices make their original price less attractive. This results in considerable economic losses for both law-abiding enterprises and governments. It has even gone so far as to deprive governments of tax revenue and increasing corruption and terrorism.

Fabrics, Silk, and Yarn, along with gold, machinery and parts, electronic gadgets, and cigarettes, have been categorised as one of the top five things smuggled into India in a recent FICCI report[1] titled “Invisible Enemy.” Fabrics, Silk, and Yarn smuggling varies from Rs. 5,390 crores to Rs. 8,038 crores each year.

The Modi administration’s concentration on “Make in India” has resulted in a slew of tariff and indirect non-tariff measures aimed at discouraging imports into the country. One of the explicit directions is to make import regulations stricter for importers, and to put a stop to undervaluation, misdeclarations, and other methods of evading import charges. 

LUXURY BRANDS CONCEPT:

Luxury brands are those with the highest price-to-quality ratios on the market, and while the ratio of functionality to price for some luxury goods may be low, the ratio of intangible and situational utility to price is very high. Hence, luxury brands compete on the consumer’s perception of exclusivity, brand identity, brand recognition, and perceived quality. Luxury brands/luxury fashion brands are associated with a high level of uniqueness, price, quality, extraordinariness, aesthetics, and a high degree of non-functional connections in the minds of consumers.

GROWING DEMAND FOR LUXURY BRANDS IN INDIA:

Market expansion is being driven by improving lifestyles and a greater awareness of international premium brands. Furthermore, growing classes of affluent customers, such as working women and financially independent youth, are driving demand. The increasing number of premium luxury companies entering India demonstrates the country’s potential as a growth hub for luxury products. Global luxury brands are extending their presence in India, lured by the country’s existing client base, raising brand awareness, rising disposable incomes, and credit availability.

PRICE AND TYPE OF THE PRODUCT SMUGGLED:

The thumb rule is that the larger the product’s worth in the domestic market, the greater the probability of smuggling. Smugglers are interested in high-value products, i.e., Luxury Items because they provide a high risk-reward payback. Due to their ease of smuggling and huge financial benefits, gold, diamonds, and high-value but small-quantity narcotics/drugs are always on the radar of smugglers. Significant price arbitrage between two countries for a commodity, which enhances the profit margin for smugglers, is one of the fundamental causes of smuggling. One of the main considerations in the smuggling of luxury commodities is a significant price gap across jurisdictions. In India, high-value gadgets and luxury watches are among the most commonly smuggled items. Products that can be easily counterfeited are more prone to smuggling.

TYPES OF PUNISHMENTS:

Two types of penalties for violators according to The Customs Act:

• Civil Liability: Penalty imposed by departmental authorities for violations of statutory provisions, which can include monetary penalties and the confiscation of goods. The Customs Act’s Chapter XIV (Sections 111-127) deals with the seizure of commodities and conveyances, as well as the enforcement of penalties.
• Criminal Liability: A criminal offence carries a sentence of imprisonment and a fine, which can only be imposed following a trial in a criminal court. Both a penalty and a punishment may be imposed for the same offence. Other violations under the Act are dealt with in Chapter XVI (Sections 132-140A).

Even if we accept that smuggling has numerous unfavourable factors at a macro level, such as Direct Revenue Loss for the Government, rendering Local Industries uncompetitive, and posing various social and economic risks, many companies still prefer to overlook these factors when making costing decisions. At an individual level, however, knowing that smuggled items may be confiscated despite any change in form or being in an inseparable combination form with other commodities under the requirements of Section 120 of the Customs Act, 1962, would be frightening. According to Section 121 of the Customs Act, 1962, the sale earnings of any smuggled products sold by a person who has knowledge or reason to believe that the commodities are smuggled goods are also subject to confiscation.

Other factors that negatively influence the clothing brand/ manufacturer include DRI Summons for smuggled items acquired from importers, media defamation, under-invoicing by the importer to the buyer, GST irregularities, Farzi Bills, delays in customs clearances, and poor delivery commitments. As a result, it is critical for buyers to conduct due diligence on the source of the fabrics/raw materials in order to prevent feeling stranded due to a lack of negligence on their part. 

IMPACT OF SMUGGLING LUXURY GOODS:

Many firms use other importer companies to get their goods into the country in order to avoid the hassles and risks associated with it. It is as if you are sitting on someone else’s boat with a hole in it. Importers generally use Farzi firms in the names of their staffs/relatives to avoid coming under the radar of the departments. However, since all Central Government departments, including Central Customs and Excise, GST, and Income Tax, have been linked, it has become much easier for the taxman to discover and catch defaulters.

IMPACT ON ECONOMY:

Smuggling Luxury Goods incurs monetary costs due to tax and tariff avoidance. Smugglers add to the government’s budget by avoiding legal obligations and taxes/tariffs. In a developing economy, indirect taxes are more important than direct taxes, and insufficient indirect tax collections may jeopardise the government’s ability to provide goods. The Luxury Goods boost economic productivity, and failing to do so has a detrimental impact on productivity, development, and economic growth. Official measures such as growth and income distribution may be harmed by smuggling. It involves bribery and other sorts of corruption, and it has a tendency to increase criminal behaviour in the economy.

IMPACT ON GOVERNMENT:

Smuggling of Luxury Goods is one of the tax offences that wreak havoc on a country’s tax system. The government is facing serious challenges, including lower tax receipts, greater public welfare expenditure, insurance and health-care costs, and job losses as legitimate companies go out of business. It stifles legal imports and reduces the amount of money received by state agencies from various tariffs and levies. Customs duty accounts for a large portion of the Central Government’s revenue, which shows a decreasing trend in recent years.

“CLASSIC” SMUGGLING:

Some sorts of “traditional” smuggling methods are very common. Like, some companies, for example, adopt a strategy in which low volume/high-value commodities are mixed in with high volume/low value goods that are difficult to check, false customs reports are made, and the shipment is then moved to a warehouse where the high value items are separated.

RECENT INSTANCES:

Here are a few recent cases of smuggling rackets that have been busted:

• July, 2021: In Gurugram, a luxury car smuggling[2] that had caused a duty evasion of more than Rs 25 crore by importing 20 vehicles into India in the names of diplomats and selling them to private individuals was discovered.
• June, 2021: Nearly 70,000 authentic Luxury Goods[3], including Cartier watches, Hermès Birkin and Kelly bags, Celine and Balenciaga bags, Gucci and Louis Vuitton footwear, and Louis Vuitton jewellery, were confiscated in Hong Kong, along with “expensive food ingredients and highly endangered species” destined to China.
• September, 2020: In India, Luxury watches[4] are among the most heavily smuggled items. Expensive watches worth over 51 lakh rupees were confiscated at Delhi’s Indira Gandhi International Airport. The accused were smuggling four luxury wristwatches from Dubai to a large luxury watch dealership in Delhi. The showroom was also raided, with 29 smuggled Luxury Chopard watches discovered thereby worth a total of ₹38 crores.

HOW TO COMBAT SMUGGLING?

Smuggling of Luxury Goods has negative consequences for a country’s economy in multidimensional ways. Smuggling has become easier due to globalisation, which has allowed for a massive increase in trade, increased mobility, and fast means of communication. To control the growth of smuggling, the government and industry organisations must work together.

Proposals for the country to address the problems of smuggling are:

• Strengthening domestic production and minimising the demand-supply gap
• Strengthening Customs’ Risk Management Capabilities
• Leveraging Technology and boosting Innovation
• Tariff rationalisation.
• Punishments and the Rule of Law should be enforced more strictly.
• System for Electronic Tracking
• Human Resource Capacity Building at Customs.

CONCLUSION:

The consistent up-swing of the Luxury Goods smuggling graph continue to harm India’s economy and public safety.

Combating smuggling/trafficking necessitates a thorough understanding of the problem’s nature and extent, as well as best methods for monitoring and controlling these operations. First and foremost, India’s government must prioritise anti-smuggling initiatives as a matter of public policy. Actions to improve IP laws, increase enforcement, and implement harsher penalties will reassure genuine business owners and customers whose Intellectual Property Rights the government is serious about safeguarding, and will assist to boost the economy.

Moreover, enhancing India’s IPR enforcement regime will convey a message to criminal networks that such behaviour will not be condoned. Public officials, international governmental organisations, industry, and consumers must work more collaboratively to raise awareness of the substantial economic and societal consequences of smuggling and to find innovative and effective measures to combat it. There exists a strong link between IP protection effectiveness and a country’s economic performance. IP systems have a substantial impact on each country’s economy, FDI, employment, innovation, and overall competitiveness, as well as enabling productivity and efficiency benefits.

But massive pricing disparities may lead luxury spenders to start shopping abroad again.

References used:

[1] https://ficci.in/spdocument/20807/final-Smuggling-report.pdf

[2] Khushboo Narayan, (July 17, 2021, 4:04PM) https://indianexpress.com/article/cities/mumbai/dri-busts-luxury-car-smuggling-racket-3-held-7408576/

[3] https://www.thefashionlaw.com/15-5-million-worth-of-authentic-luxury-goods-seized-in-hong-kong-as-price-gaps-prompt-smuggling-parallel-imports/

[4] Stela Dey, (September 27,2020), https://www.ndtv.com/delhi-news/luxury-watches-worth-rs-3-crore-seized-in-delhi-smuggling-racket-busted-2301710