Finance Minister Nirmala Sitharaman’s proposal to hike customs duty on gold and other precious metals has not gone down well with the gems and jewellery industry, with many saying it will only lead to increase in smuggling.
It was back in 2013 that the then Congress-led UPA government had raised the import duty on gold to 10 per cent to control the widening current account deficit and reign in a depreciating rupee.
In her maiden budget speech on Friday, Sitharaman proposed to increase the customs duty on gold and precious metals to 12.5 per cent.
The All India Gem and Jewellery Domestic Council (GJC) in a representation to the government last month had called for the duty to be reduced to 4 per cent since the current account deficit had narrowed now.
With the increase in customs duty, coupled with a 3 per cent GST, the overall taxes on gold will come to 15.5 per cent. It will lead to a rise in jewellery prices and could dampen consumer sentiments. Globally, gold prices have risen as investors move to the safe haven asset amid rising trade tensions and fears of a slowdown in major markets.
“The proposal to increase custom duty on gold and precious metals will certainly lift gold prices in the country. Since the domestic prices are already at multi-year highs due to a weak rupee and higher international prices, the new decision would cause an additional burden on buyers,” said Hareesh V., head of commodity research at Geojit Financial Services.
Indians consumed 760 tonnes of gold in 2018, according to World Gold Council, which estimated demand in 2019 would be around 750-850 tonnes.
GJC termed the move “disappointing” and “unfortunate” and said that it would have a negative impact on the indigenous gems and jewellery industry.
“This is not in tune with Make in India principles. The increase in customs duty for gold, which is our basic raw material, coupled with GST, will make it more expensive and encourage smuggling,” said Anantha Padmanaban, chairman, GJC.
According to latest available data, customs authorities siezed 3,223 kilos or Rs 974 crore worth gold in the year-ended March 2018.
The Gems and Jewellery Export Promotion Council (GJEPC), which had also called for a reduction in import duty on gold, diamond and coloured gemstones to get some blocked capital released is also disappointed. Pramod Kumar Agrawal, the chairman of GJEPC, feels some business could move to other countries.
“The gem and jewellery industry is going through very tough times with decline in exports and job losses, and the industry expected some positive announcement as encouragement to our sector. The increase of import duty on gold and silver while not decreasing the import duty on processed diamonds and gemstones will result in growth of business in neighbouring countries as the foreign tourists will stop buying jewellery from India, and processing of larger diamonds will shift to competing countries such as China and Vietnam,” said Agrawal.
Several jewellers also expressed their displeasure with the move.
“Increase in customs duty is not a good move for the industry. It will lead to more grey business and eventually more smuggling of gold. Not sure if the government has really analysed the effect,” said Asher O., managing director of Malabar Gold and Diamonds.
Somasundaram P.R., managing director, India, World Gold Council, said that the import duty hike will impede efforts to make gold as an asset class, particularly when gold prices are already rising globally. He also believes that the grey market will “thrive.”