Tax rise to spur gold smuggling in India, says trade group

Industry raises concern after central bank curbs force banks and traders to halt imports of metal

PUBLISHED : Thursday, 15 August, 2013, 12:00am
UPDATED : Thursday, 15 August, 2013, 3:31am

The third increase this year in import taxes on gold by India, the world's biggest user, was set to boost smuggling ahead of the festival and wedding seasons as official imports halt on central bank curbs, a trade group said.

Gold premiums in the country had jumped to a record after banks and traders suspended imports since the Reserve Bank of India made it mandatory on July 22 for shippers to set aside 20 per cent of shipments for re-export as jewellery and the increase in tariff to 10 per cent from 8 per cent would further crimp supplies, said Haresh Soni, the chairman of the All India Gems & Jewellery Trade Federation.

"Smuggling of gold will increase and the organised industry will be in disarray," said Soni, whose federation represents about 300,000 jewellers and bullion dealers. "Goods will be kept unofficially and the situation will be uncontrollable. Jewellery prices will rise."

India increased taxes on imports of gold, silver and platinum on Tuesday to tackle a record current-account deficit that has weakened the rupee, sending it to a record low.

Overseas purchases surged 87 per cent to 383 tonnes in the past four months from a year earlier after a slump in bullion prices spurred demand for jewellery, bars and coins. Increased smuggling may undermine government efforts to curb demand and hurt sales at retailers including Titan Industries.

"Though measures aimed at gold look the easiest to implement, the efficacy of such measures will always remain in question," ICICI Securities said. "Further curbs on gold imports could lead to alternate channels developing, apart from causing severe stress to the jewellery firms and consequently unemployment."

The tariffs on gold and platinum imports were increased to 10 per cent from as low as 4 per cent at the start of the year, while the levy on silver was raised to 10 per cent from 6 per cent, the Ministry of Finance said.

Finance Minister Palaniappan Chidambaram plans to curtail imports to 850 tonnes this year to reduce the current-account deficit and boost capital inflows by allowing state-run financial companies to issue "quasi-sovereign" bonds to finance infrastructure investments.

The deficit, mainly fuelled by crude oil and bullion imports, is the biggest risk to the US$1.9 trillion economy, according to the central bank. The rupee fell to a record low of 61.805 per US dollar last week.

The "government's intention is to ensure that gold imports are reduced", said Rajesh Mehta, the chairman of Rajesh Exports. "Once the festival season starts, there could be a shortage in the market. With this duty increase, more imports from the legitimate channels will get into the illegitimate channel."