Nirmala Sitharaman’s new budget has, however, reduced the duty on gold, which has had an instant impact on the price of gold, which is consistently falling since the new policy was unveiled. As per the new policy, the custom duty on gold bars was reduced to 7.5 percent from previous 12.5 percent, which means that effectively the duty works out to 10 percent, after adjusting for the 2.5 percent additional agriculture and infrastructure cess (AIDC) imposed across the board. With an additional 3 percent GST, consumers will now be paying 14.07 percent as tax for refined gold compared to 16.26 percent previously, a reduction of 2.19 percent in tax post budget.
According to an analysis by the World Gold Council, the policy announcements made in the Union budget should be positive for India’s gold industry. Lower import duty and rural welfare schemes may boost demand and hinder unofficial imports.
The council believes that lower tax rate might be a tailwind for gold demand. As per its assessment, if everything else is held constant, a 1 percent decrease in gold’s import duty may increase consumer demand by 3 tonnes per year in the long-term, while there may be an additional short-term effect this year. The model suggests that, a 1 percent decrease in gold’s import duty may increase consumer demand by 1.9 percent immediately. This could equate to a potential 6 tonnes increase this year for every 1 percent decrease in import duty.
The long-term impact of this lower import duty has been calculated to translate into an increase in demand of 7 tonnes, while the short-term impact is an increase in demand of 13 tonnes in 2021.The important takeaway from all this is that the short-term impact on gold demand may be higher than long- term as the effect of lower custom duty level fades over time. Further, the various rural welfare schemes announced in the budget are expected to boost rural income and rural demand for gold.
And now, going back to the most crucial effect of the budget proposals on gold smuggling, the lower import costs may spur official inflows in remaining part of the current year. With gradual recovery in gold demand, official imports began to recover in the second half of 2020, with official imports 6 percent higher year on year in the fourth quarter, compared to 96 percent decrease in the second quarter. This, in turn, meant that there was more than a proportional increase in the gold smuggled into the country through various channels. With a lower custom duty and recovering demand, the council expects that official imports may further gain strength in 2021 at the cost of unofficial imports, which is a more respectable term for smuggling.
Further, the revision in the pre-trial disposal of seized gold by expediting such disposals is expected to curb unofficial imports. According to the council, a lower custom duty could expedite the government’s efforts to encourage cashless transactions and to drive greater transparency in the gold market. It feels that the lower customs duty may further help the fight against black money and illicit activities.
Another important announcement in the budget is the notification of Securities and Exchange Board of India (SEBI) as a regulator for gold spot exchanges. The move is expected to spur infrastructure development, good delivery standards, and probably enable India to emerge as a major bullion trading hub. (IPA Service)
LOWER DUTY SEEN PROVIDING TAILWINDS TO GOLD DEMAND
BUDGET REMOVES A MAJOR INCENTIVE FOR SMUGGLING
K Raveendran - 2021-02-06 10:12
The pitfalls of an existing policy often remain under the surface until it is replaced by a new one that is more pragmatic. This cannot be truer than in the case of the government’s gold policy. The foreign exchange outgo on account of high import of gold, both through formal and informal channels, has been a major consideration for the government in arriving at the duties and taxes on gold. But by hindsight, it is now clear that the high duty often ends up incentivising gold smuggling, as a result of which gold smuggling through airports and other transport terminals has in recent past gone up to unprecedented levels. At the same time, gold prices were on a steady climb. In fact, gold prices increased by 42 percent since the custom duty was increased to 12.5 percent in July 2019.