India raises gold-import tax for second time; prices drop

March 16 (Bloomberg) -- India, the world’s biggest bullion buyer, increased the tax on gold imports for the second time this year after record purchases widened the current-account deficit. Gold for immediately delivery fell.

The government will tax gold bars and coins and platinum at 4%, Pranab Mukherjee, finance minister, said in his budget speech for the year starting April 1. That’s up from 2% set in January. There was no change on the silver tax.

India doubled the tax on gold and silver on Jan. 17 by imposing a levy on imports as a%age of the price, compared with the previous system of tax by weight. Global bullion prices rallied for an 11th year in 2011 as purchases by India peaked at 969 metric tons. Futures in India gained 32% last year, exceeding the 10% advance in global prices, as the currency slumped to a record low.

“The Indian market will wait for lower prices and there is also the risk that this duty hike will lead to increased smuggling,” Edel Tully, an analyst at UBS AG in London, said by e-mail today, in response to questions from Bloomberg News. “Today’s duty increase will dampen Indian demand.”

Gold for immediate delivery fell 0.6% to $1,647.88 an ounce at 12:54 p.m. in London.

Non-Standard Gold

The import duty on so-called non-standard gold doubled to 10% and the levy on ore, concentrates and so-called dore bars doubles to 2%, Mukherjee said in his speech.

“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,” said Mukherjee. “I have been advised to strengthen the steps already taken to check this trend.”

The excise tax on refined gold climbs to 3% from 1.5% and the government will also levy a 1% excise duty on non-branded gold jewelry, the minister said. Jewelry purchases in excess of 200,000 rupees will attract a 1% tax from July 1, he said.

“The demand will reduce in the short-term,” said N. Balaji, general manager at MMTC Ltd., the country’s biggest gold importer. “As people in India like to invest in gold as a safe investment for longer-term, people will accept this hike after some time,” he said by phone from New Delhi.

Imports may drop to $38 billion in the year starting from April 1 from $58 billion this year, Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in a report last month. Consumption fell 7% to 933.4 tons in 2011 as the currency plunged, cooling purchases for festivals and marriages, according to the World Gold Council.

‘No-Man’s Land’

“The fundamental reasons for buying gold jewelry are unchanged,” said Ajay Mitra, managing director for Middle East and India at the World Gold Council. “They are rooted in Indian culture and weddings. Investment demand is driven by the need to protect against inflation, ease of liquidity and the increasing use of gold as a monetized asset to secure loans.”

The increase in tax was more than expected by the industry and imports will not be affected, said Mehul Choksi, chairman of Gitanjali Gems Ltd. Imports plunged 44% in the fourth quarter to 157 tons as jewelry demand slumped 44% to 103 tons and investment demand declined 38% to 70 tons, the council said on Feb. 16.

Bloomberg News

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