India’s proposal to reintroduce sales tax on jewellery on top of the import duty it already levies will impact demand for gold, but could also trigger smuggling as Indians are unlikely to reduce their appetite for their favourite metal.
Successive governments have battled hard for years to dampen demand and keep imports down in the world’s second-biggest consumer of gold in their attempt to keep the country’s trade deficit down. Annual imports of nearly 1,000 tonnes of gold accounts for a quarter of the country’s trade deficit
Finance Minister Arun Jaitley’s proposal in his budget speech to levy a 1 percent excise duty on gold jewellery from the next fiscal is a simialr effort, but just like in the past it might have to be rolled back under industry pressure.
Angry jewellers went on a strike the last time the government imposed excise duty on gold jewellery in 2012, forcing it to call off the decision. They might take that road again.
Falling demand could also see millions of artisans lose jobs and again trigger an increase in gold smuggling, which the government would not want.
The government actually has few choices.
A gold monetisation scheme it launched to get people to part with a hoard that is believed to be more than 20,000 tonnes has been unsuccessful in pushing them to take the metal out of their lockers and temples.
Recent high prices has already impacted demand, even as a slowing global economy has again made gold a safe haven
Jewellery sales in India fell in the last two months due to a price rally and as consumers delayed purchases hoping for a cut in import duty, but since the budget has brought new taxes India’s big fat jewellery industry is very likely to protest and demand a roll back