Import duty on gold up 2%, ETFs to be freed

Tags: News

Move will hit hard, but won’t curb imports: Jewellers

The government on Monday hiked import duty on gold to 6 per cent from the prevailing 4 per cent to curb growing demand for the yellow metal that investors and householders use to hedge against inflation. The unrelenting demand for gold imports despite rising prices over the past four years has led to ballooning of the current account deficit.

Along with duty hike, the government also announced steps to unfreeze gold physically held by mutual funds under gold exchange traded funds (ETF). The gold physically held by these funds would be released by allowing them to invest in gold deposit schemes of banks. This would also help partially meet the demand for gold by jewellers.

Prithviraj Kothari, managing director, RiddiSiddhi Bullion said the hike in customs duty “would have a loud impact on the bullion sector”. The hike sums up to around Rs 60,000 (approx) per kg of gold. To be clear, with this duty hike a difference of 7 per cent between international and domestic prices of the yellow metal is evident, he said.

Bachchraj Bamalwa, chairman, All India Gems and Jewellery Trade Federation said, “Allowing gold ETFs to deposit idle gold with banks is a positive step. But, this will only increase investment demand and defeat the real purpose of curbing imports”.

As the world’s largest consumer, India imported $56.5 billion of gold in 2011-12, next only to oil imports that were over $80 billion. Gold imports touched $38 billion in the first nine months of the current financial year, forcing the government’s act on Monday.

India’s current account deficit reached an all-time high of 5.4 per cent of GDP in the July-September 2012, setting alarm bells ringing in the government’s ‘A’ team that manages the economy.

Along with gold, import duty on platinum too was increased to 6 per cent from the present 4 per cent.

Announcing the decision, economic affairs secretary Arvind Mayaram said, “It is difficult to establish the impact (of the tax) on current account deficit and by how much it will come down. But, there will be some moderation in gold demand.”

While increase in gold duty would come into effect immediately, there will also be consequential changes in additional customs duty and excise duty to be notified later, revenue secretary Sumit Bose told newsmen.

The duty hike will be reviewed after sometime if there is moderation in imports, Bose said. However, no deadline has been set for such a review on the impost.

So far, demand has declined only modestly, following a 13 per cent rise in domestic gold prices last year, and some higher taxes. In the last budget, then finance minister Pranab Mukherjee had hiked import duty on gold to 4 per cent from 2 per cent.

“The hike in import duties will have no impact on demand. Gold demand in India cannot be curbed artificially; the import demand has to be addressed through other means like routing gold through domestic supply,” Kishore Narne, associate director and head of commodity and currency, Motilal Oswal Commodity.

The government has tried to curb the overall demand by hiking import duty. It is the investment demand that has been increasing in the recent years. The hike in price due to duties does not concern investor, as they are mostly interested in returns. As immediate fallout, there will be a change in the formula for the calculation of landed price and nothing more than that, Narne said.

“The advantage of freeing gold held by mutual funds under gold ETFs will bring into circulation a part of the gold lying in stock, partially meeting the requirements of the gems and jewellery trade,” Mayaram said.

“It is hoped that consequently, there will be a moderation in the quantity of gold that is imported into the country,” Mayaram said.

Asked if duty hike would result in increased smuggling, Bose said the government machinery kept a constant vigil and it would be further intensified now.

The government has already consulted Sebi and RBI with regard to ETFs. The finance ministry will modify the gold deposit scheme while RBI will tweak with the norms reflecting these changes, Mayaram said.

Sebi will then issue a circular in the next two-three weeks enabling gold ETFs to deposit part of the physical stock of gold held by them with banks under the gold deposit scheme. Sebi would notify the quantum of physical stock that would be allowed, he said.

The advantage of the scheme is that the gold, now being held idle, could be utilised by banks as secured loans to gems and jewellery industry.

Under gold ETFs, provided by mutual funds, units sold to subscribers are backed by physical gold held by them as per Sebi rules. Several banks already offer gold deposit scheme that is onward lent to the gems and jewellery trade. At the end of the deposit period, the depositor is entitled to return of physical gold or its equivalent in cash at the current market price of gold.

“This may lead to rise in illegal channels and malicious activities with respect to importing gold and related products like jewellery, in the country. In turn, it will lead to an increase in unemployment among skilled artisans, with around one to two million people dependent on this sector to earn their livelihood. It would also affect businesses of local jewellers across the country,” Kothari of RiddiSiddhi Bullion said.

The government should have banned the gold funds and gold ETFs till current accout deficit comes under control. It should have taken measures to bring out gold from individual households and offered an amnesty scheme where the source of gold was not enquired. If 10 per cent of the private gold reserves come out into the market, the jewellery industry will not need imports for three years. In these three years, the economic situation will improve and gold prices also will come down,” Bamalwa said.

Lakshmi Iyer, head of fixed income and products at Kotak AMC, said the measures announced for gold ETFs could curb imports to some extent. It is an attempt to increase gold availability in the market. It will not have any correlation with investment demand, which is price elastic.”

krsudhaman@mydigitalfc.com

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