India, the world?s largest gold buyer and consumer, has effectively doubled the import tax on gold and silver to discourage large inflows of the precious metals that have added in good measure to the country?s widening current account deficit (CAD).
While an import duty of 2% was imposed on gold in lieu of a flat tax of R300 per 10 gm, silver will now attract a 6% duty, instead of R1500 per kg.
However, the import duty on gold ornaments, excluding those studded with stones or pearls, and tola bars has been fixed at 5%, effective from Tuesday, according to a Central Board Of Excise and Customs notification.
Gold traders said the duty change would translate to about R570 per 10 gm for gold, which is priced globally in dollars, while the duty on silver purchases from abroad would be around R3,000 a kg at current rates, making the metals costlier. The price of gold and silver in the domestic market will rise as a result.
The move followed apprehensions expressed by economists and analysts that large purchases of gold from overseas will add roughly to 1% of the GDP to the current account deficit for the fiscal year through March, driving up the deficit to well above 3% of the GDP. Economists have been reckoning that a surge in imports of gold, considered as a rather idle asset compared with many other instruments, will offset a surplus in services at a time when exports have slowed and imports remain strong.
Gold imports may have risen by more than 25% in 2011 in value to around $50 billion due to the high price of the metal and a more than 16% depreciation of the rupee, according to industry estimates.
?This is a very prudent step. If imports fall, it will have some positive impact on CAD. And if imports still rise due to robust demand, the government will earn some revenue in the form of tax. However, I don’t see the rise in import duties on gold dragging down CAD significantly in 2011-12,? said CARE Ratings chief economist Madan Sabnavis.
Higher duty won?t hurt rural demand drastically due to the traditional as well as sentimental appeal of the precious metal, although there could be some impact on investment demand.
?Again, it will depend on how much returns they get on gold compared with other assets,? Sabnavis said.
Analysts and industry executives said the move came too late in the current fiscal and is unlikely to improve the CAD significantly. The country’s current account, which comprises the balance of trade, net factor income such as interest and dividends and net transfer payments, remained unchanged at $16.9 billion in the July-September quarter from a year earlier, as a widening trade gap was offset by service-related inflows. However, the deficit could have been higher in the third quarter that witnessed merchandise exports slowing down sharply, even as imports of oil and gold in value terms remained high.
?The move won’t impact the market much. The lower duty was imposed when prices were around Rs 13,000 per 10 g. Prices have more than doubled since then. So, the tax structure is still fine,? said Bombay Bullion Association president Prithviraj Kothari.
?Higher duty is unlikely to affect investment demand in gold, as the metal is still one of the most profitable instrument available to investors in these difficult times when the macro-economic crisis in Europe is worsening,? said a senior executive with a Mumbai-based asset management company, who didn’t want to be named.
?Any fall in gold demand for investment will depend on the availability of better options. With equity markets witnessing sharp volatility and the debt crisis in Europe showing no sign of resolution, investors really don’t have too many options,? said an executive with a brokerage firm.
Gold demand in China, too, is rising at a strong pace, giving valuable support to its prices, even if some volatility can be expected if the dollar surges against most other important currencies, as the metal sometimes shares an inverse relation with the greenback. China?s gold imports rose for a fifth month in November as investors put their savings in gold bars and consumers start buying gifts for the Chinese New Year.
?As per November data, goods exports have already moved to single-digit growth on reduced global demand. This, coupled with the sharp depreciation in the currency (which will expand the import bill in the near term), and the further drying up of capital inflows could worsen the current account deficit for the next two quarters,? Goldman Sachs wrote in a recent report.
Gold rallied to a record $1,921.15 an ounce on the
London Metals Exchange on September 6 and headed for an eleventh straight annual increase, highlighting its appeal as an investment tool. Domestic gold prices have risen by 32% in 2011, thanks to the global financial crisis and a weak rupee. Gold prices in Mumbai rose marginally to Rs 27,925 per 10 gm from Rs 27,890 on Tuesday.