With the aim of keeping a tab on the high current account deficit, finance minister Pranab Mukharjee has proposed to raise the import duty on gold and platinum. Rising gold imports and high crude oil prices are thought to be key reasons for the high current account deficit.

The FM doubled basic customs duty on standard gold and platinum bars from the existing two per cent to four per cent, and on non-standard gold from five per cent to 10 per cent. The duty increase was also extended to gold ore/concentrate and ore bars for refining from one per cent to two per cent.

Rajiv Jain, chairman of the Gems & Jewellery Export Promotion Council (GJEPC), says the increase in import duty would promote the bringing in of precious metals through illegal channels. The government should have, instead, waited for the impact of the earlier increase in January (2012), when the government doubled customs duty, he said. In fact, gold imports had already started falling.
 

According to an analysis by Emkay Commodity Research, the indicative duty change will result in a price rise of Rs 556 per 10g of gold at current prices.

Apart from gold and platinum, the minister proposes to impose import and excise duty on a host of items, while exempting only a few. For instance, he has imposed a duty of two per cent on cut and polished coloured gemstones.

As a measure to control unaccounted money, a customer buying jewellery worth over Rs 200,000 by paying cash would also have to pay tax at one per cent of transaction value (which the seller is to collect and deposit with the government). Excise duty has also been extended to unbranded jewellery in the Budget, restricted till now to branded products. However, the one per cent duty on such unbranded jewellery would be charged on 30 per cent of the transaction value declared in the invoice.

Likewise, the excise duty on gold jewellery sold from export units into the Domestic Tariff Area was increased from five to 10 per cent, while that on refined gold was raised from 1.5 to three per cent. Theres full exemption from excise duty on goldsmith and silversmith wares of precious metals or of metals coated with precious metals and not bearing a brand name. Gold coins of a purity 99.5 per cent and above, and silver coins of a purity of 99.9 per cent and above, are also fully exempted now from excise duty. And, so will branded silver jewellery; so far, only unbranded silver jewellery was exempt.

While the key proposal relates to the import duty on gold, will it impact demand? Gold demand in India is likely to remain firm despite the higher duty, as consumers are unlikely to shift from gold to alternative metals like silver, especially for wedding jewellery, said Ajay Mitra, managing director of the World Gold Council (India & Middle East).

The increase is also seen as a contrast to recent measures taken by China. Anjani Sinha, managing director of the National Spot Exchange, notes the government of China, which promotes individual buying through various means.

Sanjay Kothari, vice-chairman of the GJEPC, noted there were other ways to restrict import, detailing some.