India’s gold consumption is recovering from a seven-year low in 2016, largely due to government attempts to discourage gold purchases, especially those made with cash.
According to the World Gold Council (WGC), demand for gold in India increased by 15% to 123.5 tonnes in the quarter ending March, compared to the same quarter last year.
However, the WGC predicts demand in 2017 to drop for a number of reasons. The government has taken initiatives to tighten gold buying and curb imports, such as levying new excise duties, placing a cap on cash transactions and requiring a PAN card to make purchases.
Another event that’s expected to impact gold demand in India is the introduction of the long-awaited goods and services tax (GST) on July 1. GST will supplant and streamline a network of indirect state and national levies and create a common market, to the benefit of organized players.
While most of corporate India has welcomed GST, individual sectors are anxious as tax rates for different categories have yet to be fixed.
How will gold be taxed after GST comes into effect?
Gold is currently subject to a 10% import duty, as well as a value-added tax (VAT) and excise duty of 1% each, for a total tax rate of 12%.
The GST Council has decided on five slabs for goods (0%, 5%, 12%, 18% and 28%), but has not yet applied these rates to individual items.
There is a lot of speculation from media and those close to the metals and jewellery sectors around possible tax rates. It’s believed that gold jewellery will be taxed at a higher rate than bars and coins, and that rates on gold will be announced closer to the date of the GST rollout, to avoid arbitrage.
Amongst GST latest news, the Chief Economic Adviser Arvind Subramanian has suggested that gold to be taxed at 12%. In that case, combined with the 10% import duty, gold could potentially be taxed at 22%.
Industry insiders are pushing for a special slab for the precious metal, saying that even the lowest bracket - 5% - is too high. The retail and jewellers lobby is pushing the government for a 1.25% GST rate and a lower customs duty of 4%, which seems unlikely.
Will demand for gold drop if it’s taxed too highly?
Analysts believe a tax rate above 12% will deter gold-obsessed Indians and impel them to seek alternate channels to acquire the commodity and evade taxes.
Ahead of GST, WGC has forecast gold demand for 2017 at between 650 tonnes and 750 tonnes, below the 10-year average of 845 tonnes.
Previous moves to adjust various levies on gold led to an increase in prices and a decrease in demand. Last year, the government backtracked on its decision to reduce to 2 lakh the threshold of the 1% excise duty on gold purchases made in cash, which resulted in nationwide strikes by jewellers.
Smugglers have been busy since the previous government raised the import duty on gold to 10% in 2013 to address a ballooning current account deficit.
The WGC says last year, more than 100 tonnes of gold was smuggled into India.
Efforts to shift consumers away from physical gold toward exchange-traded funds (ETFs) have proved unpopular. Experts say the costs associated with ETFs and the lower returns compared to physical gold have left Indians unswayed.
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