Sharp cut in import duty on gold to curb smuggling, free up funds, says CBIC chairman Sanjay Agarwal
Sun July 28 2024
The decision for a sharp reduction in import duties on gold and silver will help check gold smuggling and free up blocked funds, said Central Board of Indirect Taxes and Customs (CBIC) chairperson Sanjay Agarwal.
Given that gold is the primary raw material for the gems and jewellery sector, the move can also unlock blocked funds for these businesses, he explained, as the sector pays the duty upfront and only realizes the sale value after production.
Finance minister Nirmala Sitharaman, in the union budget, proposed a sharp cut in the import duties on gold and silver bars from 15% to 6%, on gold and silver dore from 14.35% to 5.35%, and on platinum from 15.4% to 6%. This sector is crucial as it provides significant employment and contributes substantially to exports.
As per trade analysts, the objective behind reducing the duties is to balance the inflow of cheaper bullion comin in. India imports gold mainly from Switzerland, the UAE, South Africa, Peru and Australia. But gold from the UAE is substantially cheaper because they enjoy zero tariff on account of the free trade deal between the two countries.
Smuggling increased following the duty hike in July 2022, with gold seizures rising by 37.14% from FY23 to FY24, increasing from 3,500 kg to 4,800 kg. Imports jumped from $33.6 billion in FY 2019 to $48.8 billion in FY 2024, marking a 45.2% increase over the period.
India's gold jewellery exports have also seen a steady rise from $6.59 billion in FY 2021 to $10.99 billion in FY 2022, $12.29 billion in FY 2023, and $13.24 billion in FY 2024. "We need to ensure the sector remains healthy, as this is a key factor among others. The import duty on gold was increased in July 2022 due to the prevailing circumstances at that time, including a worsening current account deficit (CAD). The increase was intended to reduce normal imports,” the CBIC chairman said.
"This had an impact on the gold import value, which decreased. Subsequently, the CAD position improved,” Agarwal said. However, trade experts have expressed reservations about the duty cut, suggesting it is a temporary measure. They pointed out that gold was being imported as a platinum compound at a mere 5% tariff, benefiting from a 10% duty arbitrage.
“With the new Most Favored Nation (MFN) duty on gold at 6%, this arbitrage is reduced to 1%, but it is expected to increase again. Next year, the arbitrage will rise to 3.9%, and in two years, it will increase further, reaching 6.4% when CEPA tariffs on platinum drop to zero,” said Ajay Srivastava of the Global Trade Research Initiative (GTRI). a think tank.
The duty cuts on precious metals will cause the government an annual revenue loss of Rs. 28,000 crore, based on FY2024 import levels, the GTRI chief said, adding that this is a significant fiscal sacrifice, but a necessary step to curb the unsustainable influx of bullion and protect the domestic market.
“The duty cut is expected to significantly boost the export industry, leading to the creation of numerous job opportunities. Although the exact number of new jobs has not yet been evaluated, there is a general consensus that the bullion business will experience growth," Vipul Shah, the chairman of Gem & Jewellery Export Promotion Council (GJEPC), said.
"This measure will enhance productivity and exports, which, in turn, will generate more employment for artisans and ultimately increase exports,” Shah said. Sachin Jain, the regional CEO for India at the World Gold Council (WGC), said it will reduce the incentives for smuggling of gold and create a level playing field for honest industry stakeholders.
“Gold prices will also correct locally, thereby giving a boost to retail gold demand – another incentive to the Indian gold industry,” Jain said.
Source: https://www.livemint.com/