MUMBAI India has reintroduced a local sales tax on gold jewellery after a gap of four years, on top of record import duty, in a move officials hope will dampen demand for the precious metal in the world's second biggest consumer.
Successive governments in Asia's third largest economy have struggled to curb Indian appetite for gold despite the imposition of a 10 percent import duty in 2013 and other restrictions introduced from time to time.
Annual imports of up to 1,000 tonnes of gold, accounting for about a quarter of India's trade deficit, have also prompted the government to launch a scheme to mobilise a pool of more than 20,000 tonnes of the metal lying idle in homes and temples.
Finance Minister Arun Jaitley, presenting his third budget on Monday, announced an excise duty of 1 percent on gold and diamond jewellery. A report from his ministry on Friday said gold was under-taxed in the country, where the richest 20 percent account for roughly 80 percent of gold purchases.
Jewellers said the new duty will cut demand, which could eventually put a brake on the safe haven rally in global bullion prices.
"The excise duty will bring jewellers' business to a standstill," said Ketan Shroff, a spokesman for India Bullion and Jewellers Association, saying many of the nearly 10 million artisans working in the industry could lose their jobs.
The government imposed an excise duty in 2012 too, but was forced to roll it back after jewellers went on a strike.
This time trade bodies are planning to meet finance ministry officials to request scrapping the duty, said Praveenshankar Pandya, head of the Gem & Jewellery Export Promotion Council.
More curbs typically lead to more illegal trade. Unofficial gold transactions have been rising since India made it mandatory for customers to disclose their tax code for high-value purchases.
"For every tax, jewellers have to deal with different government agencies," said Aditya Pethe, a director at Waman Hari Pethe Jewellers. "For a jeweller it is difficult to comply with excise duty rules."
Jewellery sales in India fell in the last two months due to a price rally and as consumers delayed purchases hoping for a cut in import duty. This forced importers to offer a discount of up to $53 per ounce over global prices to clear their inventory.
But Jaitley surprised the market by maintaining the duty and instead raising the concessional countervailing duty on imports of gold dore bars, an alloy, to 8.75 percent from 8 percent.
Local gold prices jumped 1.4 percent after the move, while shares of major jewellers such as Gitanjali Gems and Titan Company fell.
"The discounts will come down gradually in the next few days since now there is clarity regarding the duty structure," Waman Hari's Pethe said.
($1 = 68.4650 Indian rupees)
(Editing by Krishna N. Das and David Clarke)