Excise duty fades gold’s glitter

Bullion and jewellery shops across country have remained shut since March 16 against tax hike.

Written by George Mathew | Mumbai | Published: April 6, 2012 12:40:20 am

Finance Minister Pranab Mukherjee is facing a golden wrath. The bullion industry — the largest in the world — has turned up the heat on Union Budget proposal to raise duty on gold imports and levy excise on unbranded jewellery. Bullion and jewellery shops across the country have remained shut since March 16 as traders argue that the government’s tax hike proposal will hit the industry hard and lead to closures.

What does the industry say?

Vinod Jain,president of the Mumbai Wholesale Gold Jewellers Association,says the jewellery fraternity has seen dwindling volume of business due to the rise in gold prices. “At a time when the industry was looking for some respite,the Central government has made it a precarious situation by increasing the import and excise duties,” he says. The industry also claims the high duty will lead to unchecked smuggling of the metal. The industry,comprising 600 retail and wholesale jewellery associations,representing over 3 lakh jewellery units,has demanded a complete rollback of the duty hike.

What’s the quantum of hike?

The basic customs duty on standard gold bar,gold coins of purity exceeding 99.5 per cent and platinum has been increased from 2 per cent to 4 per cent and on non-standard gold from 5 per cent to 10 per cent. Besides,non-branded jewellery has also come under the ambit of excise net of one per cent. In addition to this,TDS (tax deduction at source) has been proposed for cash purchase of jewellery above Rs 2 lakh. The increase in customs duty and excise would mean an increase of about Rs 825 per 10 grams on the current prices of gold.

Why was the duty hiked?

The increase in customs duty was mainly done to provide some relief on the current account deficit front which has been under pressure owing to the rising imports in the gold and other precious metals. Huge gold imports — around Rs 2,50,000 crore was spent to import 969 tonnes last year — represent a massive strain on investable resources and weaning away domestic savings from gold assumes importance.

Why is the Centre worried?

Being the largest importer of gold in the world,India accounts for nearly one-third of the annual demand with import bill rising from $4.1 billion in 2001-02 to $33.8 billion (Rs 1,69,000 crore) in 2010-11,a rise of 724 per cent in 9 years. Calculated on the basis of compound annual growth rate of period 2010-11 over 1999-2000,the gold import bill could total $100 billion by 2015-16. Gold imports could become unsustainable and cause severe strain on the balance of payments besides affecting exchange rate. Gold as a commodity does not add much to the productive capacity of an economy. As per the Reserve Bank of India’s review of macro-economic situation,the current account deficit is a cause of concern because of inelastic gold and oil demand.

What experts say?

Harish Galipelli,product head commodities and currency derivatives,JRG Securities: “While the duty was hiked to curb the demand for gold imports,we don’t feel it will have any long-term impact on prices or customer demand. For the government,the rise in custom duty will add to extra revenue meanwhile if this move really reduces demand,it will aid reduction in current account deficit.” Ajay Mitra,MD,India and Middle East,World Gold Council: “While there may be a very short-term impact to demand for gold as a result of this measure,we believe that in the longer term,this increase will not substantially affect demand.”

GOLD IMPORTS – A COSTLY AFFAIR

* India produces around two tonnes of gold a year against the imports of 969 tonnes — which means over Rs 250,000 crore was spent to import the yellow metal in calendar 2011

* The total import value of gold during last financial year was higher than the gross state domestic product of 12 states and budgeted estimated expenditure on fertiliser and food subsidy

* India imported more gold than the annual budgeted estimated expenditure outlay on water supply urban development and sanitation

* India’s gold demand is ironically 37.6 per cent more than China’s although China’s GDP is 3.5 times of India’s GDP

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