The Indian government has slashed the import tariff value of gold from $573 per 10 grams to $530. Though the decision was not taken due to the pressure from the Indian bullion industry, which has been protesting the duty hike, marketmen said it would provide a breather to the troubled industry. In the case of silver imports though, the tariff value remains unchanged at $1,036 per kilo.

The import tariff value, which is released fortnightly, is the base price on which the customs duty is determined and is used by the finance authorities to prevent under invoicing and to check the import of precious metals. 

In addition to this, and to get wary consumers to come back to the bullion market, the tax authorities in India have announced that a refund can be claimed on the 1% tax to be levied on cash transactions for buying gold or jewellery worth more than $3900 (Rs 2,00,000). The tax was a major blow especially in the big cities where retail customers dole out cash for gold bars or jewellery. 

REPEATED HIKES

Jewellers have been arguing that the incessant increase in duties adds to the overall cost of bringing gold ashore. 

On July 3, 2009, taxes and duties as a percentage of the gold price in India was 1.9%. Three days later, this was hiked to 2.7%, with a hike in custom duty. Similarly, on February 25, 2010, taxes and duties was 2.5%, but the very next day due to a hike in custom duty, taxes and duties as a percentage of the gold price in India jumped to 3.1%.

On January 16, 2012, the change in custom duty brought this down to 2.4%, while on January 17, 2012, with a 2% custom duty charge, taxes and duties as a percentage of the gold price shot up to 3.3%. Again on March 15, 2012, taxes and duties as a percentage of the gold price was 3.3% and the very next day, with a doubling of custom duty, taxes and duties as a percentage of the gold price in India shot up to 5.3%.

Jewellers have opposed the many hikes saying that if one adds this to a combination of higher raw materials costs, it would cost them an additional $292,279 (Rs 15 million). Though many refrained from commenting on the longer term implications for gold demand, they said it would certainly curtail demand in the near term.

They pointed out that demand from India has already slipped due to the prevailing high price of the yellow metal and that any demand compression was further set to weaken global prices.

“Duty increases in gold have been on a spree since July 2009 when the reform process for gold markets was reversed. This time round, it totals to a whopping increase of more than 10 times,” said Chirag Mehta, fund manager at Quantum Mutual Fund.

In a note to his clients, Mehta said the hike in import duty would have an adverse effect on the development of the gold market in India, but has added that whether these steps would have much impact on the buying behavior of the Indian consumer beyond the short term was indeed doubtful.

There are many reasons why Indians have stayed loyal to their gold consumption habit, said Mehta, but this time round it might just be too taxing. “The price sensitive Indian consumer may refrain from buying in the short term since there is a sentiment impact of a sudden increase in price. Add to that the prevailing high price for gold and most consumers would forgo at this time,” he added.

For the past few months, the Indian government has been imposing higher duties on the precious metal. In the recent Union Budget, it had doubled the customs duty on gold leading to an outcry from the industry.

The recent move to reduce tariff value has been termed an infinitesimal gesture. “Over the weekend, the Indian government has reduced the import tariff value of gold by 7.50%. Though the announcement was made through a notification from the Ministry of Finance, the small reduction will not counter the impact of increased customs duty. We are planning to increase our prices by 5% to 7% next month,” said Sonamull Shah, bullion retailer.

BLACK MONEY

Over the last few days, traders said gold had started losing its lustre in the international market too. “There is a very strong belief that Indian imports of the precious metal will reduce following the budgetary proposals. Moreover, a recovery in the growth prospects of the United States has also led to greater preference for equity and a clear movement away from gold,” said an investment banker.

Though gold has remained range bound over the last few weeks and exhibited less volatility, analysts said the tax refund option could galvanise some interest. Tax authorities have been insisting that the purchase of gold and jewellery is the second largest parking space for black money in India and the budgetary proposal has decided to tax cash dealings related to the purchase of gold.

Officials have noted that if the purchases are made via a cheque, there would be no tax levied. An official of the Central Board of Direct Taxes noted that if a customer purchases gold by paying out cash and if the money is shown in the filing of tax returns, then a refund could be claimed on the 1% tax deducted. 

Though earlier this year, the Indian government had changed the duty structure on gold and silver from specific to value linked, making precious metals more expensive, India, the world’s biggest consumer of gold, could well cede its position to China in the next quarter, said traders. Imports are expected to fall over 35% this year from a record 969 tonnes in 2011, they added.

iPad Version – A saleswoman displays a gold necklace at a jewellery showroom in Kolkata: REUTERS/Rupak De Chowdhuri