The reduction in import duty on gold from 15 per cent to 6 per cent in the Union Budget was done to help exporters. But it is likely to check gold smuggled into the country through illegal channels. Gold imports can also be impacted in the short term.
Import duty on gold was at very low levels until 2013 when it was hiked to 10 per cent, to support the current account deficit and the rupee. It was again hiked to 12.5 per cent in July 2019. Data from the Directorate of Revenue Intelligence shows that the quantity of illegal gold seized was quite high between FY16 and FY20, above 3,000 kgs in most years. However, a reduction in duty to 10 per cent towards the end of FY21 resulted in reducing the seizures of illegal gold in FY22.
On the other hand, an increase in customs duty in FY23, from 10 per cent to 15 per cent, has once again led to a jump in the quantity of gold seized. This indicates a strong likelihood of a fall in the smuggling of gold following the sharp cut in import duty this year.
Impact on imports
Businessline analysis of the correlation between import duty changes and gold imports shows a strong impact in the short and medium term.
Gold import duty was reduced from 12.5 per cent to 10 per cent on February 1, 2021. The quantity of gold imported increased to 97.6 thousand kg in February 2021. It then continued to surge to 176.9 thousand kg in March 2021 and remained elevated at 117.4 thousand units in April 2021.
On August 13th, 2013, the import duty on gold was increased from 8 per cent to 10 per cent. Following this change, gold import quantity decreased to 18.2 thousand kg in August 2013 and remained subdued in the following months too.
Prithviraj Kothari, Managing Director of RiddiSiddhi Bullions Ltd explained, “Gold is highly price-sensitive in India, as it is a major consumer market. Reducing duties can help curb smuggling by reducing the price difference between official and unofficial channels.”