India raises taxes on gold for first time in six years

Bloomberg

India, the world’s biggest consumer of gold after China, increased the import tax on the precious metal for the first time since 2013, spurring domestic prices to a record. Shares of jewellers slumped.
The import tax on gold and other precious metals will be raised to 12.5 percent from 10 percent, Finance minister Nirmala Sitharaman said while presenting the federal budget for the year through March 31, 2020. India, which imports almost all of its gold, raised the tax thrice in 2013 to control a record current-account deficit.
India’s consumption of gold has been affected by the government’s efforts to curb its trade deficit and measures to discourage investors who used the metal to evade taxes. The high duties have spurred a spate of smuggling, including attempts to bring in bullion via planes and trains.
Domestic prices have tracked a surge in overseas spot gold and further increases would imperil demand during the festival and peak wedding season running from August to December.
The tax increase may discourage buyers and demand in the physical market may slide by 10 percent this year from 760 tons in 2018, according to the All India Gems & Jewellery Domestic Council.
The association will request the government to roll back the duty, Chairman Anantha Padmanaban said. “This is very unfortunate and disappointing,” Padmanaban said. “We were expecting a cut in customs duty and this came as a surprise and a shock. This is going to encourage a lot of smuggling.”
PR Somasundaram, managing director for India at the World Gold Council said the move will impede efforts to make gold an asset class, particularly when prices are already rising globally. “The grey market will thrive, which will dilute efforts to reduce cash transactions,” he added.
While it could hit demand in the immediate term, the import duty has had limited impact in the longer-term, said Chirag Sheth, a senior consultant at London-based Metals Focus Ltd. “The government has over the years increased the duty from a negligible level to 10 percent and now 12.5 percent and in that period jewelry demand has been fairly resilient,” he added.
The increase is a double whammy for the industry. “It will lead to a substantial increase in input costs, which will send retail prices higher and hurt sales, and provide a stimulus for illegal shipments of gold,” said Ahammed MP, chairman of Kerala-based jeweller Malabar Gold and Diamonds.
“The government should reconsider this move as gold industry plays a critical role in supporting economic growth, job creation and exports.”