On July 5, 2019, the government hiked the import duty on gold to 12.5 percent from 10 percent. The move took the market by surprise, as everyone was demanding a duty cut to support the domestic gems and jewellery industry. At present, the consumer has to pay a 3 percent goods and services tax (GST) on gold value and a 5 percent GST on making charges, in addition to a 12.5 percent import duty. This has hit the jewellery industry hard, which has already been dealt a blow by the coronavirus outbreak.
1) Current account under control : While increasing import duty on non-essential items, the government typically wants to control a rise in the current account deficit (CAD). India's current account recorded a surplus of $15.5 billion in September 2020.The current account situation is in a much better position and there is no need to hike the duty on gold.
2) The rupee factor : The rupee, which has rallied to its weakest level above 77, against the dollar in April 2020, just after the lockdown in the country, has now appreciated sustainably to higher levels at 73.02 against the dollar. Record inflows into the country and a drop in imports were a few reasons behind it.3) Record holding in SGB : As per the latest data, the government has issued nearly 58.9 tonnes of gold through the sale of sovereign gold bonds. This is valued at nearly Rs 29,037 crore and an increase in import duty by 2.5 percent would result in the appreciation of gold prices and a loss of Rs 725 crore to the exchequre, not a good idea in the current situation.4) Investors are moving from physical to paper gold : As the government increased import duty to 12.5 percent, it resulted in huge inflows into gold ETFs. Paper gold offers several advantages such as liquidity, transparency in pricing, tax efficiency, affordability, assurance of purity and safety over the physical metal.As a result is clearly visible from an import duty hike, we do not see any further reason to increase the duty from current levels.