Informist, Thursday, Jul 25, 2024

By Sayantan Sarkar and Sandeep Sinha

NEW DELHI/MUMBAI – The government's decision to slash the basic customs duty on gold, silver and platinum stems from the fact that the country's current account deficit is currently in a comfortable position, economists and industry officials said. Higher import duty on gold had led to an increase in smuggling activities, and the reduction would help bring down illegitimate trade in the country, they said.

The government reduced the customs duty on gold and silver to 6% from 15?rlier this week. Presenting the Budget for 2024-25 (Apr-Mar) on Tuesday, Finance Minister Nirmala Sitharaman said "to enhance domestic value addition in gold and precious metal jewellery in the country, I propose to reduce customs duties on gold and silver to 6% and that on platinum to 6.4%."

Experts believe that the present situation as regards to the country's current account deficit is comfortable, and a duty of 15% was too high for gold and silver. The jewellery industry had been clamouring for a duty cut on gold for the last few years. The government had hiked the basic customs duty on gold to 15% in July 2022 due to a worsening current account deficit and surging imports.

"As a proportion of GDP, the CAD dipped sharply from 2% in FY23 to 0.7% in FY24. Given this macroeconomic landscape, we see no reason to be unduly concerned about the cut in duty," Manoranjan Sharma, chief economist at Infomerics Ratings, said.

India imported gold worth $45.54 bln and silver worth $5.44 bln in 2023-24 (Apr-Mar), while jewellery exports amounted to $13.23 bln during the same period. Typically, India imports 700-800 tn of gold annually. In 2021, India imported gold worth $55.78 bln, which was more than twice the $21.96 bln it had imported the previous year.

Moreover, the country imported $18.69 bln worth of gold during Jan-Jun of 2022 alone. In July that year, the government hiked the basic customs duty on gold by 5% to curb excessive imports of the yellow metal at a time when the rupee had fallen to a record low against the dollar.

Economists said India's current account deficit is likely to remain manageable, around 1.0-1.1% of GDP in the current financial year ending March, despite the recent rise in the merchandise trade deficit. India's current account deficit in 2023-24 moderated to $23.2 bln or 0.7% of GDP from $67.0 bln or 2.0% of GDP a year ago due to a lower merchandise trade deficit.

“The reduction in basic customs duty on gold to 6% from 10% is expected to provide a fillip to gold jewellery sales, which have been tepid in the recent past because of high prices. This will drive up volumes for domestic gold jewellery retailers, including during the festive and wedding seasons,” Aditya Jhaver, director, CRISIL Ratings, said in a note.

Experts also believe that the duty cut is likely to incentivise the local industry to manufacture and invest in value addition, which may drive up exports of jewellery, thereby having a favourable impact on the country's current account deficit.

Since the import duty on gold was very high, importers began bringing gold in non-bullion form under various free trade agreements to avoid the levy. High duty rates block capital needed for manufacturing and value addition within the country's gem and jewellery industry as both gold and silver are crucial raw materials for the sector.

"For the gold industry, the reduction in basic customs duty on gold from 10% to 5% and Agriculture Infrastructure & Development Cess (AIDC) from 5% to 1% will boost the overall competitiveness of the domestic jewellery industry," said Sachin Jain, regional chief executive officer, India, World Gold Council. It will effectively reduce the overall taxes on gold from around 18.5% (including GST) to 9%, he said.

The reduction in duty is likely to lower the incentives for smuggling of gold, and will create a level-playing field for honest industry stakeholders, he said. "Gold prices will also correct locally, thereby giving a boost to retail gold demand – another incentive to the Indian gold industry.”

In a recent report, Chirag Seth, principal consultant for India at Metal Focus, said, "Previously, the smuggling cost accounted for 6-7%, while the total tax, including GST (goods and services tax), was 18%. Now, the overall tax has been reduced to 9%, causing smugglers to lose their profits".

Informist had exclusively reported on Wednesday, quoting Central Board of Indirect Taxes and Customs Chairman Sanjay Kumar Agarwal, that a lot of gold smuggling cases were detected in 2023-24 in India, with total seizures made by the customs department in the last financial year being to the tune of 4.8 tn of gold. End

US$1 = 83.69 rupees

Edited by Vandana Hingorani

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