The increase in import duty of gold, announced by finance minister Nirmala Sitharaman in her maiden Budget speech on Friday, will intensify gold smuggling, causing a huge disadvantage for organised players, according to the World Gold Council (WGC).

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Sitharaman announced a 2.5 percent increase in customs duty on gold, raising it to a record 12.5 percent from 10 percent in the world’s second-biggest bullion consumer.

The bullion industry in India has been seeking a reduction in the duty, citing various reasons including a consistent rise in gold smuggling. At 12.5 percent, the import levy is the highest on gold in the world. Including 3 percent GST, the total levy on gold would be 15.5 percent, which retailers say will dampen buyer interest.

Gold price surged to Rs 36,100 per 10g after the announcement on Friday, though it softened to Rs 35,800. Global gold prices are trading near their highest level in six years.

“The general understanding was that compliance in the industry post GST was improving and the industry was getting a lot more organised… this trend is likely to be disrupted on account of two reasons — one, consumer resistance to higher prices and two, the lure of the grey market,” Somasundaram PR, managing director, India, WGC, told CNBCTV18.com. “So compliant organised players will now have to compete with an active grey market. While surveillance has improved post GST, grey market is innovative and a threat to gold reforms.”

Gold smuggling has been steadily rising after the government raised the import duty to 10 percent in 2013. In 2017, the central government imposed a 3 percent sales tax on bullion, which improved the prospect of grey market traders.

According to WGC estimates, 100-120 tonnes of gold was smuggled into India every year for the past four years. Roughly 25 tonnes of gold was smuggled into India between June 1 and June 25 this year against the average sales of 15 tonnes illegal sales in a month, said a Times of India report.

The grey market or gold smuggling operates through land, air and sea. “However, there is still no clarity on whether it has the ability to weave a web of transactions eventually integrating them with the normal supply chain, said Somasundaram, adding that it exposes compliant sections of the industry too to the ingenuousness of the grey market.

Somasundaram said the government’s decision to hike the import duty could also be to curb the outflow of money to other countries. India ranks only after China in gold imports but the imports have dropped in recent months. A duty hike will only accelerate the drop, helping to control current account deficit.The country's gold imports have fallen 3 percent in value terms to $32.8 billion during 2018-19.

India imported 982 tonnes of the yellow metal in FY19. The imports in FY18, FY17 and FY16 stood at 955 tonnes, 778 tonnes and 968 tonnes, respectively.

In terms of impact on consumers, he said a hike of 2.5 percent will go unnoticed as the metal price has seen an increase of 12 percent in the past week due to international factors. However, given that the rupee value of gold is at all-time high, this could affect the lower income group.

“If it is a question of additional revenue from taxes, are we sure duty hikes of many other items of consumption (that are truly modern luxury as against gold which promotes savings at the lowest levels in the economic hierarchy) have been exploited to their potential?”

First Published:Jul 8, 2019 4:05 PM IST