InvestorQ : Why did the government impose higher import duties on gold?
manisha Kolvenkar made post

Why did the government impose higher import duties on gold?

Crowny Pinto answered.
1 month ago

On Friday, the local price of gold saw a sharp spike after the government raised import duties. To curb gold imports, the government had hiked basic customs duty on gold by 5%. The higher import duties will help curb the $6 billion that India spends each month importing gold from abroad. In fact, in the last two years, the gold import bill has been more than 8% of the total import bill for India. Remember, gold is an unproductive asset.

Considering its industrial applications, the government kept the import duty on silver unchanged. In addition, it also withdrew the 0.75% social welfare surcharge, which takes the total import duty on gold to from 10.75% to 15%. In addition, the import duty on gold for refineries has been raised from 6.9% to 11.85%. Overall, the consensus is that the ramifications of the duty hike would most likely be negative for the Indian market.

Even the World Gold Council has warned that the increase in duty would have adverse consequences for the gold market and could indirectly boost the grey market for gold. WGC is of the view that the effective tax on gold had now gone up from 14% to a steep level of 18.45% and could be detrimental to gold trade, unless it has been conceived as a temporary stop gap arrangement. However, government concerns on gold imports are justified.

Experts, do agree with the macro logic of this move. However, in the medium term, the impact on gold prices may be sharper as the effective of high inventory overhang depletes over time. That is when the pain will be palpable. Whether this really curbs gold imports are ends up creating a grey market for gold, remains to be seen.