Before one delves into the things that the government should, or should not do, it is necessary to reiterate two key issues.
1. Indians love gold. It is backed by sentiment, custom and even religion. Banning gold ownership (as pursued under the now extinct Gold Control Act) is foolhardiness (see: http://www.moneycontrol.com/news/business/economy/why-indias-part-illicit-love-affair-with-gold-will-sizzle-on-2324155.html).
2. Smuggling of gold into India becomes extremely attractive when import duty rates go above the normal cost of smuggling and money laundering. At 10 percent the government actually incentivises smuggling. With the addition of a 3 percent GST, the government makes gold smuggling extremely lucrative. The danger with smuggling is that it finances the creation of a smuggling channel – transportation agents, landing support, compliant officers, trade links etc. As this network becomes better and bigger, other things begin riding on this network. Drugs is often the starting point. Arms smuggling to aid terrorism is the next (Read more: Duties, taxes, corruption: How the government abets the smuggling of gold)