Gold import tax raised; move unlikely to deter buyers

NEW DELHI/MUMBAI Tue Jan 22, 2013 12:09am IST

1 of 4. A salesgirl is reflected in a mirror inside a gold jewellery showroom in Kochi April 24, 2012.

Credit: Reuters/Sivaram V/Files

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NEW DELHI/MUMBAI (Reuters) - The government has raised the import tax on gold by 2 percentage points to 6 percent to curb purchases and rein in a ballooning fiscal deficit but industry officials expect only a moderate drop in demand.

India's passion for gold, seen by many as a hedge against persistently high inflation, has led to a rise in its current account deficit, which reached an all-time high of 5.4 percent of gross domestic product in the July-September quarter.

Alarmed by the mounting current account deficit, driven by largescale gold imports, the government raised the import duty on gold and platinum to 6 percent from 4 percent.

"It is difficult to establish the impact (of the tax) on CAD (current account deficit) and by how much it will come down, but there will be some moderation in gold demand," Economic Affairs Secretary Arvind Mayaram, told reporters.

The tax would be reviewed if imports moderate, Mayaram said.

The widening current account deficit has increased India's need for foreign capital inflows and evoked memories of the 1991 balance of payments crisis, when the Reserve Bank of India (RBI) sent 47 tonnes of gold to Europe as collateral for a loan to avert a sovereign default.

India has been struggling with a trade deficit that has put the country's current account balance under pressure. To revive exports, the government last month extended an interest subsidy scheme for some exporters.

The duty hike and government's appeal to consumers to cut purchases might not help, largely due to the penchant for gold in India, the world's biggest importer.

India vies with China as top global consumer of gold, and with nearly all demand covered by imports, the country's purchases are a major factor in global prices.

Demand has declined only modestly so far following a 13 percent rise in domestic gold prices last year and some higher taxes.

As the government started talking about curbing imports, industry players said the sheer charm of gold and demand buoyed by heady inflation and meagre savings would blunt the impact of any rise in duties.


"The government's revenue will increase, but imports won't diminish," said Mohit Kamboj, president of the Bombay Bullion Association.

Fundamental reasons for buying gold -- to hedge against inflation and currency risks -- remain as strong as ever, said Amresh Acharya, director, investments at the World Gold council, a trade body funded by miners.

But a jewellery association, which had lobbied against any increase in the import duty, said imports could fall 25 percent.

Gold on the Multi Commodity Exchange ended up 0.6 percent at 30,774 rupees after rising as much as 0.9 percent to 30,847 rupees per 10 grams after the announcement.

But industry analysts fear the increase in the import tax could spur smuggling across porous borders. Illegal trade was rampant before restrictions on gold shipments were lifted in 1990.

"There has been a lot more talk this time around that this will stimulate more smuggling," said David Jollie, analyst at Mitsui Precious Metals in London.

The global market had factored in the increase in the duty, said Afshin Nabavi, senior vice-president at MKS Finance in Geneva.

Finance Minister P. Chidambaram had hinted at an increase in tax on January 2, triggering a massive jump in imports, which traders estimate at about 40-50 tonnes in the first week of the month. Premiums charged on London prices rose to the highest level in two months to $2-3 an ounce.

(Additional reporting by Jan Harvey in London; editing by Mayank Bhardwaj)

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Comments (1)
AnandRavi wrote:
”1.Will it really increase smuggling ?? if six percent is the gain – ts it risk free – the gains only after completing 17 odd consignments- till then the smuggler stands at capital risk. The profits are only after this ?? With the present vigilance and if the customs are serious – even one consignment of every seventeen is enough for the smuggler to go out of business. 2. Increase of duty is going to be passed on to the consumer. The industry is shedding crocodile tears for consumers. The same industry initially protested when gold was Rs 600/ gram with many sob stories of indian poor unable to get married with the price rise. Irony is the industry retailers went on opening chain of retail outlets with every price rise and stood to gain as they have rarely compromised on their profit margins. Gold price in 2005 was Rs600 / gram and now it is above Rs3000/ gram. Needless to mention that with the samel profit percentage the retailers stood to gain and the artisans were always X rs for every gram they worked and not in percentages. The general public money always got robbed with less purity metal which is the one reason the industry strongly objected to mandatory hall marking. The difference between the International price and to the Indian Public is always more than ten pecent even with zero duty. Hence the industry once again is misrepresenting. The psyche of india public have been completely exploited by the retailers with promoting gold as the only alternative and store of wealth with heavy jewellery 916 items .Instead if the country opens for light weight jewellery then this alone will bring down the consumption . The retailers wont be interested to sell light weight jewellery because their profits will correspondingly fall down. The Indian consumers are always taken for a jolly ride both by the international traders wth increase in prices and local traders with less content of gold than for what they are charged. Last but not the least – the industry is known for evading taxes. Go across to any outlet be it large or small- they will be too happy to give you jewellery without bill. Let the jewellers not pretend as if they are good tax payers. Once again let not the industyr or the retailer shed crocodile tears for consumers and instead let them reduce their profits by the excise duty component which is only six percent while the present profit margin of any retailer is above 12 percent in cash sales. God Save the Public from these greedy jewellers”

Jan 21, 2013 7:58am IST  --  Report as abuse
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