Budget 2012: Gold fingered, by customs

The glitter of gold just got fainter. The finance minister on Friday doubled import duty on standard gold from 2 to 4% and for non-standard gold from five to 10%. This is the second increase in customs duty on gold since the start of this year. Earlier in January, the government had increased duty from 1% to 2%.
Branded gold jewellery makers say the move will trigger an increase in prices in the range of 2.5% - 4% from early next month.
More still, a new tax on cash purchase of bullion or jewellery above Rs 2 lakh has been introduced to curb black money transactions.
“One of the primary drivers of the current account deficit has been the growth of almost 50% in imports of gold and other precious metals in the first three quarters of this year,” Union finance minister Pranab Mukherjee said.
World’s top gold importer, India imported 969 tonnes in 2011 – over half of this driven by jewellery. “The doubling of import duty will bring down imports by over 30% and lead to imports through illegal channels,” feared Prithivraj Kothari, president Mumbai Bullion Association. Gold traders across the country are likely to protest the decision, says Deepak Choksi, Gujarat regional chairman of All India Gems and Jewellery Trade Federation.
The move is also likely to impact demand and turn investors away from gold to other instruments, say experts. Gold prices saw a rally in financial year 2011-12 due to global cues and inconsistent equity markets.
“FM’s biggest challenge was fiscal consolidation. The duty hike on gold in a longer run may help in appreciation of rupee though it will hit physical imports. With mounting crude price pressure the government was bound to make such a move,” said Naveen Mathur of Angel Broking.
The duty hike will also impact jewellery exports from India.
A substantial portion of diamond-studded jewellery is made out of gold, platinum and silver. Gold jewellery prices have already increased by 3% on an average since January this year. But with gold prices mostly influenced by international rates and low manufacturing rates in India, branded jewellery retailers expect a minimal impact of the increase on consumption levels.
“There will of course be a direct translation of increase in customs duty into price hikes around 3%. However, we will not be hugely affected. With a 1% excise duty imposed on unbranded jewellery, this will give a level playing field to the branded and unbranded segments,” said Vijay Jain, CEO Orra.
Sanjay Kothari, vice-chairman, Gems and Jewellery Export Promotion Council (GJEPC) said, “Diamond jewellery always goes with gold. Like US, China, Japan and other foreign countries, India is fast emerging as the diamond jewellery consumer market. But, the duty hike would undermine the growth of the diamond-studded jewellery segment.”
Mehul Choksi, chairman and managing director, Gitanjali Gems Ltd said, “The levy of excise and customs duty on gold and gold jewellery—both branded and non-branded—will impact the jewellery consumers. Again, custom duty increase on gold bars and refined gold will impact the investment in gold, for which our country is famous the world over.”
Branded silver jewellery has been fully exempted from excise duty. Non-branded gold jewellery is also brought under the 1% excise duty announced for branded gold jewellery last year.
The finance minister has proposed a 2% import duty on coloured gems stones—on the lines of cut and polished diamonds—to curb round-tripping, or illegal repeated exports and imports of gems.
“It is good for the overall health of the $28 billion Indian diamond industry. But coloured gems stones import in the country is very negligible and it will not have much impact on the industry,” said GJEPC officials.
Budget 2012
Budget News 2012