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Gold Prices To Go Up As India Hikes Import Duty

Gold Prices To Go Up As India Hikes Import Duty

According to the Finance Ministry, India increased its import tax on gold from 10.75 per cent to 15 per cent in response to an increase in gold imports that placed pressure on the country’s current account deficit (CAD). The action aims to increase the cost of buying gold, decrease the import of the yellow metal, and maintain foreign reserves.

According to government data, gold imports in May 2022 increased by around 790 per cent, making it the largest annual increase ever. The Ministry reported that imports in June were considerable. This increase has probably put pressure on the Indian rupee, which has been losing value versus the dollar and is moving inexorably toward the 80/$ mark.

A Step Backwards?

It is unsurprising that a spike in gold imports corresponds with macroeconomic worries driving down global markets, an increase in inflation, and a global correction in cryptocurrencies. India has historically seen gold as a relatively safe and stable investment option.

The chairman of the India Gold Policy Centre, Professor Arvind Sahay, thinks that raising import taxes to their highest level since the end of the gold control regime is a very backwards move.

According to him, the action will probably encourage illegal trade and could undo all the changes that have been implemented over the past 5 years to improve market transparency and transform India into a gold hub.

Since the government recently increased the expectation of a favourable return from a commodity that they sought to diminish demand for, Mahendra Luniya, the founder and chairman of Vighnaharta Gold Limited, believes the increase shows that they are barking up the wrong tree.

“Focusing on discouraging physical gold purchases for investments by promoting digital goods like sovereign gold bonds and gold ETFs would have been a better but steadier route.,” says Luniya.

Anuj Gupta, vice president of research at IIFL Securities, agrees that the government should focus on developing alternative investment avenues to address the current account deficit position rather than only restricting the consumption of gold.

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India is the second-largest consumer of gold in the world, and an actual rise of 5% in the customs duty on gold would affect many stakeholders, mainly the gem and jewellery business.

Jewellers may experience a short-term increase in the value of their inventory of about INR 2000/10 grammes. Still, the demand for jewellery as a whole is likely to decline quickly and dissuade ordinary investors from buying more gold.

Siddharth Surana, Director of RSM India, argues that they are most likely to pass the burden of the higher customs duty—which has not been included in the goods and services tax regime—on the final consumers.

“Basic customs duties cannot be offset against other indirect tax liabilities, like GST. This leaves the jewellers who use gold as a raw material for their ornaments and jewellery with little choice but to pass along the increases in the basic customs duty to the final customer, says Surana.

On July 18, the GST rate on cut and polished diamonds will increase from 0.25 per cent to 1.5 per cent, in addition to the general customs duty hike.

What Should Consumers Do?

According to many experts, it may not be the best time to expand one’s exposure to gold as consumers view it as a hedge against inflation. Others believe it would be smart to transfer funds to other physical assets.

Chirag Sheth, South Asia’s chief consultant at Metal Focus, anticipates additional global declines in gold prices and believes it may be best for investors to keep an eye on recent price trends. According to Sheth, “continuing to expect gold to provide a hedge against inflation may not work anymore.”

On the other side, Raghvendra Nath, managing director of Ladderup Wealth Management Private Ltd, thinks the increase in import duties may encourage consumers to invest their resources in financial and real assets, which are, in his opinion, more productive assets.

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Why Government Hiked Import Duty On Gold And How Will It Affect Jewellery Prices

Since the Covid-19 outbreak started, gold prices have already been high, but if you’re going to buy new jewellery, the price is now likely to go up since the government raised the import duty on the yellow metal.

The cost of importing gold has increased by the government. The choice was made in light of the declining value of the Indian rupee, which last week touched a historic low against the US dollar by plunging to Rs 79.

Gold has historically been a reliable investment choice for people after the epidemic when returns on other saving tools fell. Additionally, it is regarded as a safe investment and an inflation hedge.

Raising the import charge on gold is one of the measures the government attempts to stop the depreciation of the Indian rupee.

Jewellers have meanwhile urged the government to rethink the increase in import duties. Ahammed MP, Chairman, Malabar Gold & Diamonds, stated: “The decision by the government to raise the import duty on gold to 15% along with the agriculture infrastructure development cess (AIDC) of 2.5 per cent will have a major impact on the jewellery industry. A major increase in gold smuggling for tax avoidance is predicted to result from increased import duties. As a result, the government could lose a sizable portion of its tax revenue. We implore the administration to reconsider increasing the import tax on gold.”

It is unclear whether import taxes will be reduced, but it seems that the government is keeping a careful eye on the situation.

Finance Minister Nirmala Sitharaman said last week that the government is keeping an eye on the situation and is aware of how the weakening currency may affect imports.

“The Reserve Bank of India is closely monitoring the exchange rate. In this world, we are not on our own. She said that we have an open economy as well, and the rupee has performed well compared to other currencies like the dollar.

Here is all you need to know about how the increase in import duties would affect gold prices in light of all of this:

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Why did the government raise the import tax on gold?

India, the second-largest gold consumer in the world, increased import taxes on gold because the country’s current account imbalance was becoming more and more of a concern (CAD). The government wants to limit gold imports and maintain foreign reserves by doing this.

The Finance Ministry reported a substantial increase in gold imports. A total of 107 tonnes of gold were imported in May, and June has seen a rise in imports.
According to government statistics, in May 2022, gold imports increased by around 790 per cent, the most in a single year.

The spike is straining the current account deficit in gold imports. Customs tax has been raised from the current level of 10.75 per cent to 15 per cent to reduce the import of gold, according to a statement from the finance ministry.

According to the World Gold Council, India imported the most gold in a decade in 2021. The nation had resumed buying gold in the last year following a pandemic-induced decline.

The Indian rupee, which has been losing its value against the dollar, has likely been under pressure due to this spike.

The decrease in gold imports could aid in currency stabilisation, increase foreign exchange reserves, and decrease the trade imbalance. The trade imbalance was $20.1 billion in April 2022 and $24.6 billion in May 2022, respectively. In contrast, the trade imbalance for the months of April and May 2021 was $21.8 billion.

Gold considerably contributed to the growth in the same, which is being caused by the import of petroleum. As opposed to $670 million in the same month last year, gold imports in May 2022 totalled $6 billion.

Have the gold prices gone up already?

India imports most of the gold used to produce jewellery; increasing import taxes will raise consumer costs.

On July 18, the rate on cut and polished diamonds will increase from 0.25 per cent to 1.5 per cent, in addition to the general customs duty hike. This might increase the cost of cut and polished diamonds, which might raise the cost of gold jewellery with diamond accents.

The 12.50% basic import duty, 2.5% agri cess, and 0.75 per cent social welfare surcharge will raise the total effective import tax on the precious metal to 15.75%.

Additionally, there is an additional GST of 3% on gold.

As a result of the duty increase on Friday, the price of 22-carat gold has increased by more than Rs 1,000.

Today’s increases in gold prices in India saw the yellow metal reach two-month highs. Gold futures on the MCX were up 0.4 per cent to Rs 52,117 for a 10-gramme contract.

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Gold prices in the last 2 years

The Covid-19 epidemic has caused gold prices to reach all-time highs. Gold sold for between Rs 41,000 and Rs 43,000 per 10 gm in March 2020. However, it surpassed the 50,000 rupee mark in July 2020 and reached a new high of 56,000 rupees in August 2020.
It is trading at roughly Rs 53,000 for 10 grammes. The import duty hike to 15% will increase the prices even more.

How is the price of gold jewellery calculated?

Jewellers use a fixed formula for particular purity with a fixed weight, GST, and making changes. Then, prices differ. The jewellers’ formula for gold rate calculation is:
Current price of 10 gm (22 KT or 18 KT) gold X (Weight in grams) + Making charges + GST at 3% on (Price of jewellery + making charges) + hallmarking charge of Rs 35 per item.

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How do gold prices vary?

Supply and demand have an impact on gold prices. Because gold is sold as a commodity, its price changes every day. In every city, there are jewellery associations that set the gold pricing. For example, the Jewellers’ and Diamond Traders’ Association in Madras established Tamil Nadu’s gold prices.

When someone buys jewellery, the cost of the gold already includes the import charge.
Even while domestic gold prices will fluctuate along with global prices, buyers will still pay more because of the duty percentage rise, regardless of global gold prices or the cost of importing the yellow metal.

Edited by Prakriti Arora

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