The demand for gold in India is one of the largest in the world and the country is a major importer of this precious metal. Despite efforts to reduce reliance on gold imports and promote alternative investment options, it remains a cultural symbol of wealth and status in the country.
Gold is heavily taxed in India. The second imported raw material, metal, greatly increases our import bill. It also causes our current account deficit to widen. To combat the deficit, the government has increased the basic gold tariff over the years to manage the flow of imports.
The total tax paid by a gold buyer in India is currently 18%, which includes basic customs duty, agricultural infrastructure tax and GST. This high duty structure makes our jewelry industry uncompetitive in export markets and illegally increases gold imports. Thus, industry players demanded lower gold tariffs in the recent budget.
However, while maintaining the current impact of import duties on gold, the BCD rate and AIDC rates have been recalibrated in the budget. The basic customs duty on gold bullion has been reduced from 12.5% to 10%, but the tax on agricultural infrastructure has been raised to 5%, from 2.5% currently. Indeed, there has been no change in the tax incidence. Meanwhile, duties and taxes on silver bullion have increased. The basic customs duty on silver bullion was increased to 10% from the existing 7.5% and the agricultural infrastructure development tax was reduced from 2.5% to 5%.
Import duties on precious metal items such as gold, silver and platinum were also increased in the budget.
However, the government has waived capital gains tax if physical gold is converted to electronic gold receipts and vice versa. This decision should encourage the purchase of gold in electronic form in the country.
Since the bullion industry is an important sector of the Indian economy, the budget aims to strengthen the whole ecosystem by increasing the use of gold available in the domestic market through recycling.
The jewelry industry in the country contributes significantly to employment, trade and foreign exchange earnings. India is one of the largest exporters of gold jewelry with a large share of the global market.
Going forward, gold prices are more likely to trade with a positive bias. Global economic instability due to ongoing geopolitical tensions and a likely pause in rate hikes by the US Federal Reserve will continue to provide downside support for the precious metal over the long term.
A possible turnaround in physical demand from China after the easing of pandemic-related lockdowns and stable jewelry demand from India could also contribute to the trend. Meanwhile, a strong US dollar, higher bond yields and stable stock markets are likely to dampen the commodity’s strong gains.
At the same time, Indian gold prices continue to trade at a premium to its international peers. This is due to a low Indian rupee, high taxes and increased demand for jewelry. Investors may consider price corrections to accumulate positions for long-term investment purposes.
(The author is head of Commodities at
.) (Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
