The World Gold Council (WGC), on Tuesday said that the increase in gold import duty in the Union Budget may lead to additional smuggling of gold, especially during periods of high demand such as the festival season.
Finance Minister, Pranab Mukherjee, in the Union Budget for 2009-10, announced a 100 per cent hike in customs duty on serially-numbered gold bars and gold coins to Rs 200 per 10 grams. Customs duty on other forms of gold and silver too has been doubled to Rs 500 per 10 grams and Rs 1,000 per kilogram, respectively.
"We hope that this higher duty rate does not add to significant trading through non-official channels. The difference in price between the internationally-sourced gold and Indian domestic gold widens to 3-3.5 per cent per 10 grams due to additional taxation and this could lead to additional smuggling, especially during periods of high demand during festival season," WGC said in a statement in Mumbai.
While welcoming the Governments massive economic impetus measures, WGC has also warned that the rise in gold import duty in the Budget would put added pressure on the gold market, already suffering from high local prices and the impact of lower consumer spending.
The Indian Government has announced in its budget that it is investing heavily in the agricultural, industrial and social sectors in an effort to boost consumer confidence and drive economic growth, resulting in a budget increase of 36 per cent. To help pay for this package, the gold industry has become a tax target, WGC said.
The Indian gold market is notoriously sensitive to price. We have recently seen record Rupee prices, and coupled with the impact of global recession this has put a significant dampener on local gold demand," it said.
"The Governments announcement is a double-edged sword and while we welcome the broader confidence-boosting package, which we believe will help drive consumer spending, we caution the addition to gold import duty, which will inevitably add cost to the end consumer and impact gold demand," World Gold Council's Managing Director Indian Sub-continent, Ajay Mitra, said.
WGC pointed out that there are two key changes in the Indian budget that have an impact on the gold market. The import duty on gold bullion has doubled from Rs 100 per 10 grams to Rs 200 per 10 grams.
The Rs 100 duty has been applicable since 2004, when the gold price was Rs 5,800 per 10 grams and import duty was 2 per cent of the gold price. After this increase, import duty as a percentage of the gold price is 1.4 per cent, it said.