By Ravindra Rao
Gold prices in the domestic market have been trading at a marginal discount to international prices partly due to strength in Indian Rupee and partly due to sluggish physical market activity ahead of the budget. After the surprise decision of the last Budget when the Finance Ministry cut base import duty on gold from 12.5% to 7.5%, market players have moved to sidelines ahead of this year’s Budget. There has been a long going industry demand to reduce import duty to dissuade illicit trades and reduce distortions between domestic and international markets.
Market expectations dimmed after the surprise rate hike in 2019 when base duty was raised from 10% to 12.5%. The government however decided to cut rates last year giving some boost to the industry. The move took the market players by surprise and caused volatility in domestic prices for some days.
In the last few days, market expectations have picked up that the government may further reduce the import duty. There have been talks that base customs duty may be reduced further from the current 7.5% to 4%. However, some expect that the duty cut may be compensated by a hike in GST rate, which currently stands near 3% nullifying the impact for consumers.
Additionally, industry players are also calling for rationalizing the capital gains rates to boost investment in gold. Right now, the long-term capital gains from the sale of gold are taxed at 20% compared to 10% flat tax on long-term gains from shares. In addition, gold has to be held for three years to be eligible for long-term treatment while stocks have to be held for only one year.
While there are increased talks of rate hike, we do not expect a further duty cut. Gold imports have risen sharply this year and lower prices may further incentivize imports. As per Commerce Ministry data, India’s gold imports have more than doubled to $38 billion during April-December this fiscal because of higher demand.
Capital gains rates in gold must be rationalized as the government has been working hard to promote investment in paper gold and gold linked instruments to reduce allure for physical gold.
While we do not expect a rate cut, if the government decides to reduce duty on gold it will affect domestic prices. If import duty is cut and GST is hiked by similar quantum, the end price for consumers may not change. On the derivative front, since MCX Gold futures rate includes import duty but no GST, any duty cut may have a negative impact on prices.
(Ravindra Rao – CMT, EPAT, VP- Head Commodity Research, Kotak Securities. Views expressed are the author’s own.)