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The net reduction in import duty on gold is much lesser than the rise in prices, and is not enough to revive demand. It is also expected to have a low impact on smuggling.
The Union Budget had cut customs duty on gold to 7.5 per cent from 12.5 per cent, but had levied an additional 2.5 per cent Agriculture Infrastructure Development Cess and another 10 per cent Social Welfare Surcharge on customs duty. The overall net import duty adds up to 14 per cent including GST, compared to 16 per cent before the Budget.
The 2.19 per cent cut juxtaposed against a 42 per cent rise in gold prices since July 2019, when duty was last raised, may not be a strong trigger for demand, said the World Gold Council.
A one per cent fall in gold import duty may increase consumer demand by three tonnes per year in the long term. The 2.2 per cent net reduction in the import duty had increased demand by 7 tonne per year, it said.
Unofficial imports fell by a whopping 80 per cent last year to 20-25 tonnes due to logistical disruptions caused by Covid, and may be further impacted this year with ongoing flight restrictions and lower customs duty.
Though a duty rate of 14 per cent continues to make the grey market attractive, lower customs duty and recovering demand may also boost official imports, said the Council.
In a year when unemployment and loss of livelihoods have been a reality, the support eco-system around tax avoidance is likely to be even stronger, it added.
Somasundaram PR, Managing Director, India, World Gold Council, said the cut in customs tax duty was hopefully the first of a series of such cuts. Tax cuts soften price increases, but are not necessarily a big driver of demand unless the cut is steep or is accompanied by a sharp drop in domestic prices due to other factors.
The appointment of SEBI as the regulator of domestic gold spot exchanges will spur infrastructure development and good delivery standards, enabling India to emerge as a major bullion trading hub.
"We expect the formation of the International Bullion Exchange at GIFT-IFSC city to happen more quickly as the relevant notifications and regulations have already been published and the authority is working on the enactment of the operational framework of the exchange," he added.
The domestic gold exchange may take longer, as SEBI chalks out future steps to work on the modalities of the exchange and the necessary regulatory framework, he added.
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