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Gold Prices May Rise as Import Duty on Gold raised by 5%

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The Indian government has raised the import duty on gold to 12.5% from 7.5% according to a government release on Friday, 1 July 2022. With the 5 % increase in import tax, the total tax on gold will now amount to 15.75%. The decision has been taken to check the rising CAD (Current Account Deficit) in India.

India meets its high gold demand mainly from gold imports. Notably, the rupee fell at a record 79 per dollar this week and may even go beyond. the rising gold imports put pressure on the value of the rupee which made the government take the unexpected decision today.

Adding up the import duty with the agriculture infrastructure development cess (AIDC) of 2.5%, the effective gold customs duty will now be 15%.

However, it remains to be seen what the impact of rising import duty on gold would be on the gold prices in India. 

Some experts opine that this decision will make gold more expensive domestically, pushing consumers to pay higher prices. On MCX, gold rates today rose by nearly 3% to ₹52032 per 10 gram after the increase in import duty on gold in India.

The Finance Ministry said in a statement that “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. The surge in gold imports is putting pressure on the current account deficit.” In May 2022, the trade imbalance of India reached a record $24.3 billion.

India is the second-biggest consumer of gold after China. Interestingly, Finance Minister Nirmala Sitharaman had decreased the custom duty on gold from 12.5% to 7.5% last year and the total levy amounted to  10.75%, including cess, social welfare surcharge and GST. A GST of 3% is charged on gold in India.

The buyers of the precious metal had significantly reduced during the pandemic but since the last year, gold purchases have considerably increased. According to World Gold Council, India imported more than 100 tonnes of gold in May, considerably higher than imports in April 2022 (27.1 tonnes) and May 2021 (11.4 tonnes)

Moreover, the retail market in India for gold stayed robust during May due to wedding- and festival-related buying.

The increasing import bill in India has pressured the government to raise the import duty on gold. The revised import duties will be applicable from June 30, 2022. After the announcement of the hike in import duty, the local gold prices rose by nearly 3% while the global prices dropped by 1%.

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