The story so far: In a move towards standardisation and preventing the circumvention of duty, the Finance Ministry on Tuesday hiked import duties on gold and silver findings and coins of precious metal to 15%. This is inclusive of Basic Customs Duty (BCD), taxed at 10% of assessable value, and Agriculture Infrastructure Development Cess (AIDC) at 5%. Additionally, spent catalysts or ash containing precious metals would draw a total import duty of 14.35%. The new rates are effective from January 22.
What exactly has happened?
The primary endeavour is to standardise taxation rates, and thus prevent observed circumvention. Somasundaram PR, Regional CEO (India) at the World Gold Council (WGC) told The Hindu that the measure is to essentially plug a gap and bring duty on gold findings and coins at par with the overall customs duty rates on gold bars. “This will eliminate sections of trade taking advantage of duty arbitrage,” he said.
Gold and silver bars are presently taxed at 15% of the assessable value. The revision places the import of the two metals in the form of findings (that is hooks, clasps and other components that are used in making jewellery) in the same slab. Thus, they seek to disincentivise indirect imports of the two metals with the objective of circumventing the higher taxation slab (as with bars before revision). As explained to news agency Reuters by a government official, the move was necessitated after a surge in imports of gold findings in the last two months. Notwithstanding the fact that it is the second-largest consumer of gold, India relies heavily on imports with scant domestic production. As observed in the Ministry of Commerce’s Trade Stat database, import of unwrought gold and/or gold in semi-manufactured (or powdered) form in October 2023 rose 95.41% on a year-over-year basis to $7.23 billion. This was in the run-up to the festive season. Furthermore, between April and October last year, imports rose 23.1% to approximately $29.5 billion. This was before a moderation was observed in November. Notwithstanding this, gold imports (for the period starting April 2023 to November) remained 21.1% higher on YoY basis.
Vipul Shah, Chairman at Gem & Jewellery Export Promotion Council (GJPEPC) explained to The Hindu that the 5% differential served as a significant incentive for importers who may look to import low-value crude findings with the intent of converting them into gold bars (through melting and refining). He stated that latest measure aims to curb such practices.
Observing that the import duty now stands equalled, Mr Shah further elucidates, “Findings are generally imported in lesser purity (18 carat or less) and duty shall be charged after converting the purity equivalent to 995 (fineness*) on which duty is levied while importing gold,” he stated, adding, “GJEPC believes that like gold bullion, the import duty should be levied based on the gold content of the findings in carats. Council has also represented on similar lines to the government,” he said.
How is gold taxed?
Import of gold draws custom duties under two heads, namely, Basic Custom Duty (BCD) and Agriculture Infrastructure Development Cess (AIDC). The latest revision will see BCD being charged at 10% of the assessment value and AIDC at 5%. The Social Welfare Charge (SWC) is not imposed on the commodity. At the final point of sale, that is to the consumer, applicable GST rates are levied on the landed cost.
Basic Customs Duty is assessed on the final value of the goods imported. It is calculated based on the cost of the product, insurance and other freight-related expenses, all combined. AIDC is collected as an additional duty with a purpose for financing agriculture-relevant and other developmental infrastructure.
Does the move impact consumers and the market?
According to Mr Somasundaram, this move would have no impact on consumers, but it would avoid disruptions in the market due to arbitrage. However, he notes, “high duties promote illicit trade and generally act as a barrier to transparency and tilts the market against compliant players.”
To lend some perspective, the Central Board of Indirect Taxes and Customs (CBIC) in FY 2022-23 had seized about 3,480.88 kg of gold. The total value of this stood at Rs 1,947.27 crore. Gold smuggling is largely fuelled by the sizeable demand of the metal, and to escape duty on licit gold. “Smuggling of gold not only impacts the indirect tax collections, but also adversely affects the direct tax collections and feeds the parallel economy of the country,” read the Directorate of Revenue Intelligence’s report on smuggling in India (2022-23).
Overall, what determines demand in the gold market?
There always exists a positive relationship between rising income and demand for gold, while higher gold prices have a negative effect. The WGC in an earlier report about India’s gold market (published in December 2023) had observed that with a 1% increase in income, gold demand rises by 0.9%. On the other hand, a 1% increase in gold prices translates to a fall in demand by 0.4%. Furthermore, demand may also be affected by declines in household savings and reduced agricultural wages. Inflation too has a role here — savers turn to the yellow metal as a hedge against inflation. However, decline in savings could potentially emerge as a stronger factor.
Policy measures, therefore, are of particular importance to manage the entire dynamic. It must also be noted that India’s dependence on gold imports can also potentially have implications for its current account deficit.
About the recent state of demand, Mr Somasundaram observed, “Demand has been relatively lukewarm on account of high prices though seasonal factors keep interest in gold strong.”
*For clarity, Caratage measures the purity of gold that is alloyed with other metals. 24 carat is pure gold with no other metals. Fineness is another way of expressing the metal content in gold jewellery. It represents the purity in parts per thousand.
.833 = 20 carat (Asia)
.999 (1000) = 24 carat pure gold
Scales taken from the World Gold Council.
