Govt raises import tax on gold to cut deficit

India has long been the world’s biggest buyer of gold with purchases strongest during the religious festival and wedding seasons.

Agencies/New Delhi

India, the world’s largest bullion buyer, yesterday raised taxes on gold imports to reduce a record current-account deficit and moderate demand for the precious metal that’s rallied for 12 straight years.

The duty on gold and platinum imports will rise to 6% immediately from 4%, Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi. The tariff will be reviewed if imports moderate, he said. Gold was 0.3% higher after the announcement.

Increased taxes may reduce gold demand in Asia’s third-largest economy after prices jumped 7.1% in 2012 as investors and central banks boost purchases. About 80% of India’s current-account deficit, the broadest measure of trade, tracking goods, services and investment income, is due to gold imports, according to the Reserve Bank of India.

Gold is the second highest contributor to India’s import bill after petroleum products. In the first three quarters of the current financial year, India imported gold worth nearly $38bn. The total value of gold import in 2011-12 was $56.5bn.

“Consumption and imports will fall definitely,” Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation, said in Kolkata. “This will also help the government reduce the current-account deficit.”

Gold for immediate delivery climbed to $1,689.07 an ounce by 1.41pm in London. Platinum jumped 0.3% to $1,675 an ounce.

Domestic mutual funds, which offer gold-backed exchange traded funds (ETFs), will be allowed to deposit part of the bullion they hold with banks to boost availability for jewellery and gem making, Mayaram said.

“The advantage will be that a part of the gold lying in stock will be brought into circulation and will partially meet the requirements of the gems and jewellery trade,” Mayaram said.

“It is hoped that consequently there will be a moderation in the quantity of gold that is imported into the country.”

Apart from gold ETFs, the changes proposed to the Gold Deposit Scheme will make it attractive for individuals to deposit their idle gold with the banks.

The minimum quantity of gold that may be deposited will be reduced and the minimum tenure of deposit will also be reduced to six months from the present stipulation of three years.

Mayaram also appealed to the people to moderate their demand for gold.

Currently, there are two gold related schemes - the Gold Exchange Traded Fund (Gold ETF) and the Gold Deposit Scheme, that are intended to channelise gold holdings into institutional channels.

The Gold ETF is provided by mutual funds. Units are sold to subscribers through “authorised participants” and are traded on the exchange. The units are backed by physical gold held by the mutual fund.

In the Gold Deposit Scheme, banks accept gold deposits by clients which are the lent to the gems and jewellery traders. At the end of the deposit period, the depositors are entitled to a return of physical gold or its equivalent in cash at the current market price of gold.

Last March, India doubled the tax on purchases of gold bars and coins to help narrow the current-account gap. Demand for gold still picked up “significantly” in the July-to-September quarter, the RBI said in its biannual Financial Stability report in December.

The current-account deficit widened to $22.3bn in the three months to September 30 as a faltering global economy hurt exports, the central bank said on December 31.

Gold imports are “a huge drain,” Finance Minister Palaniappan Chidambaram said on January 2. Imports by India rose for the first time in five quarters in the three months to September 30, according to the World Gold Council. Purchases jumped 9% to 223 metric tonnes in the third quarter of 2012 from 205 tonnes a year earlier, the producer-funded group said on November 15.

Bullion in Mumbai surged to a record Rs32,464 ($604) per 10g (0.35 ounce) on November 26 and gained 13% last year. The contract for February delivery rose 0.6% to Rs30,775 on the Multi Commodity Exchange of India Ltd.

“In India, people have more belief that gold is the best commodity they can invest in,” said Mohit Kamboj, president of the Bombay Bullion Association. “The increase in duty is too small. The tax won’t impact imports and it will only help increase government’s revenue.”

Buying gold is considered auspicious during religious festivals and weddings in India. The festival season starts in August and ends in November, and is followed by the wedding season.