India, Largest Gold Buyer, Raises Import Tax to Cut Deficit

India, the world’s largest bullion buyer, increased taxes on gold imports to reduce a record current-account deficit and moderate demand for the precious metal that’s rallied for 12 straight years.

The duty on gold and platinum imports was raised to 6 percent immediately from 4 percent, Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi yesterday. A levy on gold ore, concentrate and so-called dore bars for refining will be doubled to 4 percent, and an excise tax on refined gold will climb to 5 percent from 3 percent, the customs said on its website. The tariff will be reviewed if imports moderate, Mayaram said.

Increased taxes may reduce demand in Asia’s third-largest economy after prices jumped 7.1 percent in 2012 as investors and central banks boosted purchases. About 80 percent of India’s current-account deficit, the broadest measure of trade, tracking goods, services and investment income, is due to gold imports, according to the Reserve Bank of India.

“Consumption and imports will fall definitely,” Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation, said in a phone interview from Kolkata. “This will also help the government reduce the current-account deficit.”

Gold for immediate delivery climbed as much as 0.3 percent to $1,694.88 an ounce in London today after the Bank of Japan set a 2 percent inflation target and shifted to Federal Reserve-style open-ended asset purchases to end two decades of deflation. It gained 0.3 percent yesterday. Platinum gained 9.5 percent to $1,685.49 an ounce since the beginning of January.

Rising Premium

Standard Chartered Plc said earlier this month that its gold shipments to India soared on mounting concern the duty would be raised. Expectations for the tax increase helped boost premiums in Asia by as much as 50 percent since mid-December, Australia & New Zealand Banking Group Ltd. said Jan. 4.

“There was a pretty clear sign that people were anticipating something was going to happen and trying to bring in some gold beforehand,” said Dan Smith, an analyst at Standard Chartered in London. “The appetite for gold is so ingrained in India, it probably won’t have too much of a dramatic impact.”

Domestic mutual funds, which offer gold-backed exchange-traded funds, will be allowed to deposit part of the bullion they hold with banks to boost availability for jewelry and gem making, Mayaram said. Investments in gold funds totaled 119.9 billion rupees ($2.24 billion) at the end of December, according to the Association of Mutual Funds in India.

Tapping Stockpiles

“The advantage will be that a part of the gold lying in stock will be brought into circulation and will partially meet the requirements of the gems and jewelry trade,” Mayaram said. “It is hoped that consequently there will be a moderation in the quantity of gold that is imported.”

Last March, India doubled the tax on purchases of gold bars and coins to help narrow the current-account gap. Demand for gold still picked up “significantly” in the July-to-September quarter, the Reserve Bank of India said in its biannual Financial Stability report in December.

The current-account deficit widened to $22.3 billion in the three months to Sept. 30 as a faltering global economy hurt exports, the central bank said Dec. 31. The rupee fell to a record low of 57.3275 against the dollar last year as bullion imports widened the current-account deficit to an all-time high.

Gold imports are “a huge drain,” Finance Minister Palaniappan Chidambaram said Jan. 2. Purchases in the nine months through December were estimated at $38 billion, compared with $56.5 billion in 2011-2012, the finance ministry said in a statement yesterday.

Nomura Forecast

Imports may drop as much as 12 percent to 750 metric tons in the year beginning April 1 from an estimated 855 tons this year, Sonal Varma and Aman Mohunta, economists at Nomura Holdings Inc., said in a report dated yesterday.

India’s gold demand slid 28 percent in the 12 months through September, as jewelers held a strike in March and April to protest taxes on imports and as local prices surged to an all-time high, according to the World Gold Council, which ranked India as the biggest buyer in the period. Higher taxes and domestic prices will again be a drag on physical demand this year, said Joni Teves, an analyst at UBS AG in London.

Bullion in Mumbai surged to a record 32,464 rupees per 10 grams (0.35 ounce) on Nov. 26 and gained 13 percent last year. Gold for February delivery was little changed at 30,780 rupees on the Multi Commodity Exchange of India Ltd. today.

‘Best Commodity’

“In India, people have more belief that gold is the best commodity they can invest in,” said Mohit Kamboj, president of the Bombay Bullion Association. “The increase in duty is too small. The tax won’t impact imports and it will only help increase government’s revenue.”

Buying gold is considered auspicious in India during religious festivals and weddings. The festivals start in August and end in November, and is followed by the wedding season.

“The interesting thing will be whether demand holds up now this has actually been announced,” Standard Chartered’s Smith said. “We saw a temporary surge. Maybe we’re going see a bit of weakness now that the implementation has come through,” he said, referring to bullion imports.

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