The government on February 1 recommended reducing import duty on gold and precious metal to 7.5 percent, a move which would make the bullion metal and jewellery cheaper in the domestic market for the buyer.
Finance Minister Nirmala Sitharaman in her Budget speech said, “It is proposed to decrease custom duty on gold and other precious metals from 12.5 percent to 7.5 percent.”
However, the government has imposed an additional Agriculture Infrastructure and Development Cess at 2.5 percent.
The year 2020 was a challenging year for all major economies including India as governments enforced stringent steps to limit the COVID-19 spread, but these measures adversely impacted economic growth.
India is the second-largest buyer of gold after China consuming 446.4 tonnes of yellow metal in 2020 worth Rs 188,280 crore ($25.4 billion), as per World Gold Council.
The gold demand in the country fell by 35 percent to 446.4 tonnes in 2020 against 690.4 tonnes in 2019 while total jewellery demand dropped by 42 percent to 315.9 tonnes compared to 544.6 tonnes in the same period on the back of COVID-induced lockdowns and lifetime high prices.
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The proposed tax reduction will make gold smuggling unviable and spur demand in the physical market. The gold and diamond jewellery trade contribute 7.5 percent of the country's GDP and 14 percent of the country's total exports, employing 60 lakh people in this sector.
“2020-21 has had a negative impact on the industry overall. While jewellers are on track to recover from the impact of the pandemic and a muted wedding season, we are hopeful that the Budget for 21-22 shall look at the jewellery industry favourably and roll out many SOPs and important policy changes that can help revive the industry in the next one year,” said Dr Saurabh Gadgil, CMD, PNG Jewellers.
“The tax reduction will keep manufacturing costs in check and help make the business viable for all stakeholders. We hope that the Government of India also relooks at the current rate of 3 percent GST and makes a reduction in the same as well.
"Creation of Gold Hubs under the Make in India initiative will help encourage manufacturing in jewellery, which in turn will ensure best-possible products for consumers across India and increase export competitiveness.
"It is critical that the government also looks at policies that encourage banks to kick-start lending once again to the jewellery sector. This will help businesses across the board to maintain liquidity and ensure survival and success," Gadgil added.
Ravindra Rao, VP- Head Commodity Research at Kotak Securities said, “A long-standing demand from the gems and jewellery industry has been to reduce the import duty on gold, which currently stands near 12.5 percent.
Indian gold imports fell sharply last year as the price surged to record high levels on the back of higher international price and higher import duty. While lower import has fared well for the trade deficit, higher price affects domestic purchases and jewellery exports as well. Market expectation is for a reduction in import duty to encourage organised trading.
Rao added that any change in import duty, if any, may have a direct impact on MCX Gold prices. For eg: one percent change in import duty might have an impact of around/approx Rs 450 per 10 gms.
At 14:39 IST, MCX, April Gold slides Rs 1,228, or 2.49 percent to trade at Rs 48,480.
The copy has been updated with detailed from the Budget document.