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Gold Import Duty hike, what next?
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In Union Budget FY2019-20, government has proposed to increase import duty on gold and other precious metals from 10% to 12.5%.  The import duty on gold dore has been hiked to 11.85% from 9.35%. Government aims to garner close to 250 bn rupees from the hike in customs and excise duty on a host of products, including precious metal, petrol and diesel.

Their decision to raise import duty on gold is an attempt to curb imports of non-essential items. In 2012, January gold import duty was raised by 2% to 10% and it has stayed at that level since then. The decision came at a time when the domestic jewellery industry was expecting a cut in the import duty and relaxation of other import norms for increasing availability of the Gold in exports and to stop illegal entry of gold in the country.

This import duty hike may negatively impact India's gold industry and will impede efforts to make gold as an asset class, particularly when gold prices are already rising globally. According to the estimates a 2.5% increase to gold’s import duty may result in a reduction of gold demand by approximately 2.4% in 2019.  If the higher levy were to become permanent, it could reduce long-term Indian consumer demand by slightly less than 1% per year (Source: WGC report). There was already a disparity between the domestic prices and the import parity price, and it will get worse. The hike will hit domestic manufacturing of jewellery. 

Impact on country’s Current Account Deficit (CAD)

CAD increased to USD 57.2 billion or 2.15% of GDP in 2018-19 as against 1.8 % in the previous year. The country’s gold imports dipped about 3% in value terms to US $32.8 billion during 2018-19 as against at US $33.7 billion in 2017-18 and Gems and jewellery exports declined 5.32 % to $30.96 billion in 2018-19. Dip in the imports expected to keep a lid on the current account deficit.

The government wants to discourage gold buying as the precious metal is the biggest contributor to the import bill after crude oil. In volume terms, India imported 982 million tonnes of the yellow metal in the previous financial year. The additional imposition of import duty now is also seen as moderating gold imports to only 700-800 million tn this year.

Increase in unorganized sector & smuggling

It is believed that the implementation of import duty will have strong effect on gold trade as only 30% is organized. Import Duty may spike the gold prices around 10-15%, which may increase the chance of smuggled gold making its way. In one year of time, it may not make much difference but one can expect some turbulence on this account in the short term. The increase in smuggling will, to some extent, be mitigated by the new tax deducted at source of 2% on cash withdrawals of more than 10 mln rupees from a bank account in one financial year.

To conclude, an increase in duty will be counterproductive to the objectives stated in the previous year's Budget and encapsulated in the NITI Aayog's recommendations for transforming the gold market. We believe gold can play a positive role in the Indian economy. But to enable this, there needs to be a reduction in overall taxes, a stable policy environment, and a transparent trading market.

 

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