Wednesday, Mar 22, 2023

Why Government Hiked Import Duty On Gold And How Will It Affect Jewellery Prices

Why Government Hiked Import Duty On Gold And How Will It Affect Jewellery Prices

The government has hiked the import duty on gold to 15% from 10.75% earlier. The decision comes in view of the falling Indian rupee which last week hit a record low of Rs 79 against the US dollar


Gold prices have already been high since the Covid-19 pandemic began but if you are planning to buy new jewellery, it is set to cost you more now as the government has hiked the import tax on the yellow metal. 

The government has hiked the import duty on gold to 15% from 10.75% earlier. The decision comes in view of the falling Indian rupee which last week hit a record low of Rs 79 against the US dollar. 

Traditionally, gold has been a consistent option for investment for people, especially after the pandemic struck as returns of other saving instruments saw a decline. Besides, it is considered a safe investment, a hedge against inflation.   

However, the government is taking all steps to stem the decline of the Indian currency, and raising the import duty on gold is among them. 

Meanwhile, jewellers have urged the government to reconsider the import duty hike. Ahammed MP, Chairman, Malabar Gold & Diamonds, said: “The government decision to increase the import duty on gold to 15 percent including the agriculture infrastructure development cess (AIDC) of 2.5 percent will have a major impact on the jewellery trade. The increase in import duty is likely to give a rise to gold smuggling to a large extent for evading tax. As a result, the government stands to lose a huge amount of revenue from tax collection. We urge the government to review the import duty increase on gold." 

It remains to be seen if there will be any cuts in import duty but it looks like the government is closely observing the developments. 

The government is watchful and mindful of the impact of the falling rupee on the country's imports, finance minister Nirmala Sitharaman said last week. 

"The Reserve Bank of India is very keenly watching the exchange rate. We are not alone in this world. We are also open as an economy... the rupee against the dollar and other currencies versus the dollar, the rupee has performed relatively better," she said. 

Amid all this, here’s all you need to know about the impact of the import duty hike on gold prices:- 

Why govt increased the import duty on gold? 

India is the world’s second-largest gold consumer and the country has hiked import duty on gold as the surge in imports was putting pressure on the current account deficit (CAD). With this, the government aims to reduce gold imports and preserve foreign reserves. 

Finance Ministry said there has been a sudden surge in imports of gold. In the month of May, a total of 107 tonnes of gold was imported and in June also the imports have been significant. 

As per government data, gold imports surged by nearly 790%, the highest ever in a year, in May 2022. 

The surge in gold imports is putting pressure on the current account deficit. To curb import of gold, customs duty has been increased from present 10.75% to 15%,” the finance ministry said in a statement. 

According to the World Gold Council, India imported the most gold in a decade in 2021. The country’s gold purchases had been picking up in the past year after buying slumped during the pandemic. 

This surge has likely put pressure on the Indian rupee which has been depreciating against the dollar. 

The decline in gold imports may help stabilise the currency, and forex reserves and reduce the trade deficit. The trade deficit in April and May 2022 stood at $20.1 billion and $24.6 billion respectively. By comparison, the trade deficit in April and May 2021 stood at $21.8 billion. 

While petroleum import is leading to a rise in the same, gold too contributed significantly to it. In May 2022, gold imports stood at $6 billion as against gold imports of $670 million in the same month last year. 

Have the gold prices gone up already? 

As India imports most of the gold to make jewellery, an increase in import duty will make it more expensive for the people. 

In addition to the increase in basic customs duty, the GST rate on cut and polished diamonds is set to rise from 0.25% to 1.5% effective July 18. This may in turn increase the price of cut and polished diamonds, which may push up the price of diamond-studded gold jewellery as well. 

The total effective import tax on the precious metal will surge to 15.75 per cent which includes 12.50 per cent basic import duty, 2.5 per cent agri cess and 0.75 per cent social welfare surcharge. Gold also attracts an additional 3 per cent GST. 

Meanwhile, the 22-carat gold rates have jumped by over Rs 1,000 amid the duty hike on Friday. 

Gold prices today extended gains in India, with the yellow metal rising to 2-month highs. On MCX, gold futures were up 0.4% to Rs 52,117 per 10 gram. 

Gold prices in the last 2 years 

The gold prices had touched record highs after the Covid-19 pandemic struck. In March 2020, gold was trading in the range of Rs 41,000 to Rs 43,000 per 10 gm. However, it crossed Rs 50,000 level in July 2020 and touched the record high of Rs 56,000 in August 2020. 

Currently, it is hovering around Rs 53,000 per 10 grams. The import duty hike to 15% is set to increase the prices even more. 

How do gold prices vary? 

Gold prices are influenced by supply and demand. Gold is traded as a commodity, hence, its price varies daily. There are jewellery associations in all cities which decide the gold rates. For example, the Jewellers’ and Diamond Traders’ Association, Madras, sets gold rates in Tamil Nadu, 

The import duty is already added to the cost of gold when a person purchases jewellery. 

While the domestic price of gold will continue to vary with variation in international prices, the actual cost for a buyer will be higher by the amount of increase in duty percentage irrespective of the international gold prices/imported cost of the yellow metal. 

How the price of gold jewellery is calculated? 

Jewellers use a fixed formula for particular purity with a fixed weight, GST, and making changes. Then also, prices differ. The jewellers’ formula for gold rate calculation is: 

Current price of 10 gm (22 KT or 18 KT) gold X (Weight in grams) + Making charges + GST at 3% on (Price of jewellery + making charges) + hallmarking charge of Rs 35 per item.