Planning to buy gold and looking forward to the upcoming budget for sops in the ensuing budget. Better rework your strategy as the finance ministry is likely to increase import duty on gold up to six per cent from current four per cent.
Other step on the government’s mind is to make gold imports immune to the bilateral treaties. A decision to the effect is likely to be taken within two weeks. The ministry’s contention being that gold import is hurting trade balances. Finance minister P Chidambaram last week urged people not to buy gold.
A finance ministry source told DNA, “Given the widening of the current account deficit, it has become imperative to dis-incentivise gold imports. Various options are being examined to curtail gold imports, which has become a heavy drain on foreign exchange. There could be import duty hike of up to two per cent, and some more steps.”
Other steps, as per the official, may be in the form of removing concession imparted to the commodity import under bilateral treaty cover. “Gold is imported from Thailand under concessional duty of one per cent, in accordance with a treaty with India,” he added. The final decision regarding this, however, has to be taken by the commerce ministry.
Finance ministry sees gold imports as the major contributor to the country’s current account deficit which logged an all-time-high of 5.4% of GDP in the first half of the current financial year at $22.3 billion. Current account is the balance of trade arrived by subtracting payments for imports from earnings on exports, and the deficit arises when payment for imports is more. According to the Reserve Bank of India, demand for the yellow metal in India has grown from 707 tonnes in 2006 to 1079 tonnes in the current year.
Experts, however, put a word of caution in the quantum of the increase as a steep rise may lead to gold imports through unlawful means. “Import duty on gold has to be kept at an optimum level so that there is no smuggling of the commodity into the country. A two per cent hike may be too steep as it is 50% more than the current duty structure,” said Bipin Sapra, tax partner, Ernst&Young.
Agrees Abhishek Goenka, CEO, India Forex Advisors. “Gold is the only practical approach for curtailing the current account deficit. Another major contributor to trade disbalance is oil imports, which cannot be touched. The only threat from curtailing gold imports is smuggling and a subsequent black marketing. If the curb is too bold there will be a black market at premium. But is not that the imports will come down as there is genuine demand also,” said Goenka.