Gold is the corpse of value...” said Goto Dengo, a character in Neal Stephenson’s novel Cryptonomicon. The sentiment strikes a chord with the aam admi as gold price spikes to new highs.

As part of its strategic initiatives to contain the current account deficit, the Government recently hiked customs duty on gold and platinum from 8 per cent to 10 per cent, and on silver from 6 per cent to 10 per cent.

Consequently, customs duties on gold ore/ concentrate, gold/ silver ore bars have also been increased.

Other luxury goods too have not been spared including automobiles and high-end mobiles phones, while televisions, laptops and exotic foods are on the radar for import duty hike. The Finance Ministry is readying a list of luxury items that have no productive purpose, except consumption, for import duty hike.

The hike is seen as an attempt to lower import demand and stimulate the domestic market. This is borne out by the recent notification to disallow import of flat panel (LCD/ LED/ plasma) television as free baggage.

With the festival season around the corner, the hike could dampen the usually high-volume business for jewellery and luxury goods. Gold price instability is the bigger worry than the duty hike per se, as high gold prices have traditionally never deterred buyers in India. Prospective buyers are wary of the risk associated with fluctuating prices. However, going by past trends the tendency to hoard the yellow metal has prevailed.

A duty hike might limit gold import and/ or curb demand in the short run, but the long-term impact remains uncertain. Rather, it could prove counter-productive and hark back to the 1970s’ spurt in gold smuggling.

Recently, the Department of Revenue Intelligence seized 4 kg of gold biscuits worth Rs 1.3 crore. Even at a smaller airport like Visakhapatnam 1.5 kg of gold was seized. Further, the depreciation of the rupee against the dollar has left gold costlier at home compared to international prices. There are those who wonder whether a duty hike will have any impact on gold import. Despite the two previous hikes, statistics show that imports increased from 141 tonnes to 162 tonnes between April and May 2013.

On the positive side, the Government’s move could encourage multinational corporations to invest in India and manufacture locally to avoid the high import duties on luxury branded products. Local manufacturers have welcomed the higher customs duty and the ban on import of flat panel televisions through free baggage.

The import duty hike could contribute substantially to the Government exchequer.

If the objective of containing the fiscal deficit is achieved along with the other key initiatives, it would help reverse the rupee’s free fall. Help could also come from the Reserve Bank of India’s recent decision to simplify the rules for non-resident Indians investing in the shares and debentures of locally listed companies.

The author is Tax Partner, EY

(This article was published on August 25, 2013)
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