Lower customs duty on gold likely to reduce unofficial imports: WGC

The cut in customs duty on gold to 7.5 per cent in the Union Budget 2021-22 is likely to reduce the grey market as recovering demand may allow official imports to gain strength, according to a report by the World Gold Council (WGC).

The lower customs duty is expected to reduce gold smuggling, the WGC 'Union Budget impact on Indian gold market' report said.

It added that the unofficial imports fell a whopping 80 per cent to 20-25 tonnes in 2020, due to logistical disruptions caused by COVID-19. It may be further impacted in 2021 with ongoing flight restrictions and lower customs duty, the report said.

Lower customs duty and recovering demand may allow official imports to gain strength at the cost of unofficial imports, although the 14.07 per cent duty continues to make the grey market attractive.

The new tax structure brings the total import duty on a gold bar, including the basic customs duty (BCD), agriculture and infrastructure cess (AIDC) and Social Welfare Surcharge (SWS), to 10.75 per cent, compared with 12.87 per cent before the Budget.

With an additional 3 per cent goods and services tax (GST), consumers will now be expected to pay 14.07 per cent tax on gold bars as compared with 16.26 per cent earlier, a net tax reduction of 2.19 per cent post budget.

Similarly, the total post-Budget import duty on gold doré (including BCD, AIDC and SWS) stands at 10.09 per cent as compared with the 12.21 per cent pre-Budget level.

However, it stated that in a year when unemployment and loss of livelihoods have been a reality, the support ecosystem around tax avoidance is likely to be even stronger.

''While the rationalisation of import duty on gold is a step in the right direction, we hope this is the first of a series of such cuts,'' WGC Managing Director (India) Somasundaram PR said.

He added that tax cuts soften price increase but are not necessarily a big driver of demand unless the cut is steep or is accompanied by a sharp drop in domestic prices due to other factors.

In the case of this year's Union Budget announcement, he said the net reduction in duty of 2.19 per cent as compared with a 42 per cent rise in gold prices since July 2019 cannot be a strong enough trigger for demand.

''Our econometric analysis suggests that the impact of this approximate 2.2 per cent net reduction in the duty may result in an increase of slightly less than 7 tonne per year in long-term consumer demand, everything else remaining constant.

''Every such cut in duty will weaken the grey market and promote transparency in official inflows,'' he added.

However, following a disruptive year when unemployment and job loss, the support eco-system around tax avoidance is likely to be stronger even at the current level of tax (post-cut) at 14.07 per cent on gold, he added.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)