The Government did on Tuesday what it ought to have done long ago. In a belated yet welcome move, it hiked the customs duty on gold and silver import and changed the levy from specific duty to ad valorem. Instead of Rs 300 per 10 grams, gold will henceforth bear customs duty at the rate of 2 per cent of value.

Similarly for silver, the ad valorem duty will be 6 per cent — a change from the earlier specific duty of Rs 1,500 a kg. Considering the cess of 3 per cent levied on duty amount, the real effective rate of duty on gold will be 2.06 per cent and silver 6.18 per cent. Customs duty on imported platinum is fixed at 2 per cent.

It is well known that India is the world's largest importer and consumer of gold. Its voracious appetite means the country imports over a quarter of the world's gold production. The value of gold import has reached astronomical level of over $ 40 billion or Rs 2,00,000 crore. Questions have been raised about the desirability of squandering such massive amounts of foreign exchange on an asset that is largely seen as unproductive.

Additional revenue

Be that as it may, bullion imports will generate additional revenue for the exchequer without unduly hurting consumers who in any case have got used to higher and higher prices for the precious metal in the last few years.

Customs duty collections on gold imports have been rising rapidly in recent years. According to the Department of Economic Affairs, customs duty collected was Rs 2,553 crore during fiscal 2010-11, up from Rs 1,566 crore the previous year. It is clearly a revenue measure for the beleaguered Government struggling to cope with massive fiscal deficit. Notwithstanding some trade opposition to the duty hike, the effect on consumption demand is likely to be negligible. Assuming that quantum of imports as well as prices remain largely unchanged, the Government is likely to realise annual revenue of over Rs 4,500 crore on gold import.

Complication

However, the levy of ad valorem duty instead of specific duty is not without some complication. Given the extraordinary volatility of gold and silver prices in the global market, levy of ad valorem duty on import can potentially lead to disputes relating valuation of the cargo and assessment to duty at the time of customs clearance. It may encourage invoice manipulation for evasion of duty. At the moment, how the Government proposes to prevent this remains unclear.

One way to prevent possible revenue loss through invoice manipulation would be to specify a tariff value for gold and silver on which the rate of customs duty may be levied. Such tariff value should be marked to the market and revised periodically, say every fortnight. It is imperative this is done soon in the interest of revenue.

Importantly, it may be necessary to earmark a part of revenue for strengthening the physical market. The bullion market in our country needs transparency. There is serious suspicion about the purity of gold ornaments sold to consumers. Hallmarking needs to be popularised and spread rapidly.

Also, small artisans and traditional jewellers need assistance. Capacity building among this category of stakeholders is necessary.

gchandra@thehindu.co.in

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