Gold Tax Hike Fuels Smuggling Fears; May Hit Festival, Wedding Season

India, the world's biggest consumer of gold after China, increased the import tax on the precious metal for the first time since 2013, spurring domestic prices to a record. Shares of jewelers slumped.

The import tax on gold and other precious metals will be raised to 12.5 per cent from 10 per cent, Finance Minister Nirmala Sitharaman said while presenting the Budget for the year through March 31, 2020. India, which imports almost all of its gold, raised the tax thrice in 2013 to control a record current-account deficit.

India's consumption of gold has been affected by the government's efforts to curb its trade deficit and measures to discourage investors who used the metal to evade taxes. The high duties have spurred a spate of smuggling, including attempts to bring in bullion via planes and trains. Domestic prices have tracked a surge in overseas spot gold and further increases would imperil demand during the festival and peak wedding season running from August to December.

Benchmark gold futures in Mumbai rose as much as 2.6 per cent Friday to Rs 35,100 per 10 grams ($512), while overseas gold was little changed. Shares of Titan Co., India's largest maker of branded jewellery by market value, slumped as much as 3.2 per cent, while Tribhovandas Bhimji Zaveri Ltd. slid as much as 6.6 per cent.

The tax increase may discourage buyers and demand in the physical market may slide by 10 per cent this year from 760 tons in 2018, according to the All India Gems & Jewellery Domestic Council. The association will request the government to roll back the duty, Chairman Anantha Padmanaban said.

"This is very unfortunate and disappointing," Mr Padmanaban said by phone. "We were expecting a cut in customs duty and this came as a surprise and a shock. This is going to encourage a lot of smuggling."

Here's a roundup of views from jewelers and industry groups on the tax increase:

PR Somasundaram, managing director for India at the World Gold Council

• The move will impede efforts to make gold an asset class, particularly when prices are already rising globally
• The grey market will thrive, which will dilute efforts to reduce cash transactions

Chirag Sheth, a senior consultant at London-based Metals Focus Ltd.

• While it could hit demand in the immediate term, the import duty has had limited impact in the longer-term
• The government has over the years increased the duty from a negligible level to 10 per cent and now 12.5 per cent and in that period jewellery demand has been fairly resilient
• The current seasonal lull in demand could help limit a sharp drop in purchases. Once the festival season begins in August and September, people would be used to higher prices

Ahammed MP, chairman of Kerala-based jeweler Malabar Gold and Diamonds 

• The increase is a double whammy for the industry. It will lead to a substantial increase in input costs, which will send retail prices higher and hurt sales, and provide a stimulus for illegal shipments of gold
• The government should reconsider this move as gold industry plays a critical role in supporting economic growth, job creation and exports
• The import duty should be lowered to 5 per cent to make illegal trade in gold unattractive

Chirag Mehta, senior fund manager at Quantum Mutual Fund

• The increase in customs duty will only distort markets further as the current differential between Indian and international gold prices will widen by 2.5 per cent to 15.5 per cent
• Such interventionist policy-making ensures that India will never be at the center of the global gold markets despite being a big consumer and will continue to remain a price taker