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Import, excise duty hike to fuel gold, silver price rally
January, 18th 2012

Consumers will have to shell out more for gold and silver jewellery, bars and coins.

The cash-strapped government on Tuesday raised import and excise duties on gold and silver, hoping to mop up about 600 crore in additional revenue and contain its burgeoning current account deficit as the financial year draws to a close. Platinum and diamonds, too, will now attract an import duty of 2%.

A government notification said customs and excise duties would be levied on the value of gold and silver instead of a fixed amount.

"This will allow the government to benefit from the rise in gold prices," said a finance ministry official. Ad valorem duty, which rises automatically when the value of a product goes up, is preferred from the point of view of tax policy as its facilitates easier credit besides capturing value addition at each stage.

While the import duty on gold has been fixed at 2% of the value instead of the earlier Rs 300 per 10 grams, that on silver has been pegged at 6% against Rs 1,500 per kg. Excise duty on gold has been fixed at 1.5% of the value against the earlier rate of Rs 200 per 10 grams. Silver will attract excise of 4% compared to Rs 1,000 per kg earlier.

At a 2% rate, the import duty on gold will double to over Rs 540 per 10 grams at current prices.

"The old rates were fixed four to five years ago. In the last few years, prices have increased substantially so the change has been made to bring duties in line with market prices," said S K Goel, chairman, Central Board of Excise and Customs (CBEC).

India is the world's largest importer of gold. The metal is the third-largest import item after crude oil and capital goods. In 2010, about 92% of India's gold demand was met through imports and the rest from recycled gold and other sources.

"Gold imports alone have contributed nearly 40 basis points to the 130-basis-point increase in India's current account deficit between FY08 and FY11," global research firm Macquarie said a recent report. In first three quarters of FY12 alone, India imported $45.5 billion worth of gold and silver, up 53.8% over the year-ago period.

"The move is possibly aimed at easing the negative balance of payments position as gold and silver imports have grown despite prices rising," said Madan Sabnavis, chief economist at Care Ratings. "Unlike other raw materials like machinery and fertilisers, gold and silver don't add to economic productivity as they are stashed away in bank lockers or cupboards."

On Tuesday, gold prices firmed up by Rs 35 to Rs 27,925 per 10 grams while silver gained Rs 575 to Rs 52,725 per kg.

However, experts are divided on the impact on demand. Leading jewellers said this would not affect demand while officials of a state-run bank and a trade body felt the move would be restrictive.

"Volatility of 1-2% is not unheard of in gold, so an increase in prices by less than a percent will not have much of an impact," said Rajesh Mehta, chairman, Rajesh Exports, which also retails jewellery in Karnataka.

Sanjeev Agarwal, CEO, Gitanjali Exports Corporation, a subsidiary of the listed Gitanjali Gems, said the margins of jewellers and bullion dealers would not be impacted as duty and taxes were passed on to the consumer. He said demand over the past year had not reduced despite a 40% jump in gold prices.

"Our experience over the past two months has shown that high prices slowed gold demand. We import gold on consignment basis from overseas suppliers," the bank official said. "I feel any increase in prices from these levels is bound to lessen demand."

Bachhraj Bamalwa, chairman, All India Gems & Jewellery Federation (GJF), said apart from hurting demand, the increase in duty at over Rs 55,000 a kilo could encourage gold smuggling and defeat the purpose of earning higher revenue. The duty hike will benefit those who have purchased gold futures contracts on commodity exchanges like MCX with the contract having risen by Rs 240 per 10 gm to Rs 27,750 after Tuesday's hike was announced.

Last year, Indians imported a record 958 tonnes of gold and World Gold Council data showed imports up to September this year were up by 11% to 753 tonnes.

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