Alarmed by the drain of precious foreign exchange in the form of rapidly escalating bullion imports, the Finance Minister, Mr Pranab Mukherjee, has sought to rein in gold imports by doubling the rate of customs duty.

He has raised the basic customs duty on standard gold bars as also gold coins of purity exceeding 99.5 per cent from 2 per cent to 4 per cent ad valorem. Platinum, too, will attract 4 per cent ad valorem customs duty on import. On non-standard gold, the import duty has been doubled from 5 per cent to 10 per cent.

At current prices, the customs duty on gold will be approximately Rs 1,000 for 10 gm. The Customs Department levies the rate of duty on a tariff value that is specified by the Department of Revenue from time to time.

Clearly, the intent of the Budget proposal is to discourage large-scale imports and at the same time generate revenue for the Government. According to reports, last year, the value of gold and silver import aggregated over $40 billion, equivalent to Rs 2 lakh crore. Such expenditure has raised serious questions over the desirability of spending scarce foreign exchange on products that have limited productive value or use.

Much of the import is seen as speculative in nature in line with price dynamics in the world market. Interestingly, the sharp hike in customs duty comes weeks after the Government hiked the customs duty on gold and silver import. In January, the Finance Ministry changed the levy of customs duty from fixed (Rs 300 for 10 gm for gold and Rs 1,500 a kg on silver) to two per cent ad valorem which in turn translated to duty of approximately Rs 540 for 10 gm of gold and Rs 3,000 a kg of silver.

Now, with the last hike, will gold prices go up in the Indian market? Yes, but the price impact is expected to be limited simply because already jewellery demand has considerably slowed down as a result of high and volatile prices. Those holding inventory of gold are of course sure to reap windfall gains with any increase in market price.

Additionally, basic duty on gold ore, concentrate and dore bars for refining has been enhanced from one per cent to two per cent. Excise duty on refined gold has been doubled to 3 per cent.

Published on March 16, 2012