India Cuts Gold Import Tax to Curb Price Surge, Illegal Inflows

(Bloomberg) -- India cut an import tax on gold as prices rallied to record highs last year and to curb inflows of illegal supplies in the world's second-largest consumer.

Prices have run up sharply since the tax was last raised in 2019, Finance Minister Nirmala Sitharaman said in her annual budget speech in New Delhi on Monday, while cutting the basic customs duty on bullion imports to 7.5% and imposing an additional tax of 2.5% to support agriculture.

Gold is one of the most-smuggled items in India, where people consider it auspicious and a store of value, and rely entirely on foreign supply. A cut in the tax will not only reduce profit margins for smugglers but also lower costs for consumers who saw prices surge to record highs last year, trimming spending on jewelry.

The lower tax can help kickstart a recovery in demand following one of the worst years for jewelers in India, when consumption slumped by more than a third to the lowest since 1994, as coronavirus-related lockdowns, curbs on movements, record high prices and lower incomes slashed spending on jewelry.

India boosted the tax three times in 2013 to shore up a slumping rupee and reverse the country's widening trade deficit and last increased it to a record high rate of 12.5% in 2019 to discourage demand for the precious metal in order to trim inflows. At the same time, smuggling became more lucrative as Indian prices were more than 15% higher than overseas supplies due to the import tax and other local taxes.

“Now smuggling will be discouraged, gold purchase through an organized retailer is encouraged and in the end, the consumers” will get gold cheaper, said Aditya Pethe, director at WHP Jewellers. “It's a very positive step, which was not expected in this budget.”

Benchmark gold futures in Mumbai fell as much as 3.9% Monday to 47,200 rupees ($646) per 10 grams, while overseas gold traded 0.9% higher. Shares of Titan Co., India's largest maker of jewelry by market value, advanced as much as 6%, while Tribhovandas Bhimji Zaveri Ltd. jumped as much as 10%.

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