Gold duty rolled back, imports may rise again

The government on Monday rolled back the 1% excise duty on gold jewellery listening to the ?outpouring of sentiments? and raised the threshold for a 1% tax collected at source (TCS) on purchases by cash to R5 lakh from R2 lakh.

Although the government did not reverse the Budget proposal to double gold import duty to 4% to trim a widening current account deficit, some analysts fear abolishing excise duty may drive up jewellery sales and boost imports of the ?idle asset?. Jewellery accounts for around 65% of the country?s gold demand.

Presenting changes to the Finance Bill, 2012, finance minister Pranab Mukherjee told Parliament: ?I would like to reiterate that the levy (of excise duty) was well-intentioned and introduced not so much for raising revenue as for rationalisation and movement towards the goods and services tax. However, the outpouring of sentiment both within and outside the House indicates that we are not ready for it. As such, the government has decided to withdraw the levy on all precious metal jewellery, branded or unbranded, with effect from 17th March, 2012.?

In April, jewellers called off their three-week strike after assurances from Mukherjee to review the Budget proposals.

The bullion industry had warned that the provisions will squeeze imports of gold ? which holds immense traditional value in Indian weddings and other auspicious occasions ? by at least 25% this fiscal year and crimp demand for jewellery.

Huge gold and crude oil imports pushed up India’s trade deficit to $184.9 billion in 2011-12, driving up current account deficit to an unprecedented 4.3% for the gross domestic product from 2.9% the previous fiscal. The current account comprises the balance of trade, net factor income such as interest and dividends and net transfer payments.

While the government imposed the excise duty on branded jewellery in last fiscal’s budget along with 129 other items to mark transition to the GST regime, the duty was proposed to be extended to non-branded jewellery in this year’s Budget, mainly to end the controversy over the interpretation of the term ?branded jewellery?. The duty was charged on a tariff value equivalent of 30% of the ?transaction value? declared on the invoice and not on the full value of the transaction.

Mukherjee, however, retained the threshold limit for the TCS on cash purchases of bullion at Rs 2 lakh, adding ?bullion will not include any coin or other article weighing 10 grams or less.?

?To curb the flow of unaccounted money in the bullion & jewellery trade, the Finance Bill proposes the collection of TCS by the seller… Responding to the representations made by the jewellery industry that this would cause undue hardship, I propose to raise the threshold limit for TCS on cash purchases of jewellery to Rs 5 lakh from the present Rs 2 lakh,? Mukherjee said.

?The proposal on excise duty is very good, as neither the industry nor the government had the proper mechanism to handle it. The bullion industry will be back on a strong footing. However, the proposal for TCS is a little discriminatory, considering that no other industry is subjected to such a tax,? Mehul Choksi, chairman and managing director of $1-billion blus Gitanjali Group told FE.

?Given the high prices of gold, withdrawing the duty will give relief to manufacturers of branded and unbranded jewelry,? Bombay Bullion Association president Prithviraj Kothari said, adding gold imports could rise responding to the pent-up demand for jewellery.

Gold climbed for 11 straight years since 2001, led by robust consumption in India and China, and soaring central bank buying following the global macro-economic crisis. Average global gold price rallied 28% last year to $1,571.52 per troy ounce, although prices in India surged 32% due to a more than 16% depreciation of the rupee against the dollar last year.

In February, the Prime Minister’s Economic Advisory Council forecast a 34% slump in bullion imports by India ? the world’s biggest gold consumer ? from a record $58 billion in 2011-12, due to the ?stabilisation of basic macroeconomic conditions at home?.

Some analysts said gold may retain lustre due to the relative appreciation of the rupee since January and the abolition of the excise duty. ?If there is a bull run in gold prices, the customs duty doesn’t matter much. Investors will still buy it. But the duty will matter when the promise of returns is not lucrative,? said Madan Sabnavis, chief economist at CARE Ratings.

Gold prices on the Multi-Commodity Exchange shed 0.7% to Rs 28,978 per 10 grams in intra-day trade on Monday tracking weak global sentiments, as the election of Francois Hollande as France’s president weakened the euro and reduced demand for alternative assets. In the spot market in Mumbai, standard gold dropped by Rs 240 to close at Rs 29,040 per ten grams.

Huge imports over the year have made Indians the world’s largest gold-hoarders, with rural households alone piling up 18,000 tonnes of jewellery and bars worth nearly $1 trillion, or around 70% of the country’s economy size.