India Seen Boosting Gold Tax for Second Time to Cut Deficit

India, the world’s biggest gold buyer, may increase import taxes for a second time this year as it seeks to narrow a widening current-account deficit, curbing demand for bullion in jewelry and investment.

“There’s a feeling that the government is looking at increasing the duty again, maybe to 8 percent,” said Bachhraj Bamalwa, chairman of the All India Gem & Jewellery Trade Federation. “The industry fears they may re-impose the excise tax, which was scrapped last year.” The levy is now 6 percent.

India will present its annual budget on Feb. 28. Finance Minister Palaniappan Chidambaram is seeking to curb the spending deficit, partly by increasing taxes. The government may also increase import tariffs on cooking oils, according to the Solvent Extractors’ Association of India. Gold rallied for a 12th year in 2012 as investors and central banks boosted purchases, forcing India to triple the import duty.

“We’re keeping our fingers crossed as any change will be bad for the industry,” said Bamalwa. “We’ll be happy if the status quo is maintained.” A further increase in the levy may cut imports as much as 20 percent this year from 860 metric tons in 2012, he said by phone from Kolkata.

D.S. Malik, spokesman at the finance ministry in New Delhi, declined to comment on the tax changes today.

Jewelers’ Strike

Gold demand for jewelry and investment in India fell to 864.2 tons in 2012, the second straight year of decline, after consumption was curbed by a jewelers’ strike for three weeks to protest a 1 percent excise duty on non-branded ornaments. While the excise duty was later scrapped, the shutdown cost the industry about 200 billion rupees ($3.7 billion) in revenue, according to the jewelers’ federation.

Immediate-delivery bullion fell as much as 0.6 percent to $1,555.55 an ounce, the lowest price since July 12, and was at $1,573.37 at 5:31 p.m. in Mumbai. The metal has fallen 6.1 percent this year. Gold for April delivery dropped as much as 1.1 percent to 29,263 rupees per 10 grams on the Multi Commodity Exchange of India Ltd., the lowest price since July.

About 80 percent of the current-account deficit, the widest among the biggest emerging economies, is due to gold imports, according to the Reserve Bank of India. Governor Duvvuri Subbarao, who cut the benchmark interest rate by 25 basis points last month to 7.75 percent in the first reduction since April, has cited budget and current-account deficits among those constraining further cuts in borrowing costs.

Encourage Smuggling

India should recycle gold scrap, impose export obligations on bulk purchasers and take “fiscal measures” to curb imports and domestic demand, a panel set up by the central bank to study issues related to imports and companies lending against the metal said in a report this month.

“By increasing the duty you are going to encourage smuggling,” Monal Thakkar, president of Amrapali Group, an importer, said by phone from Ahmedabad. “India will either remain number one or number two importer.”

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

Imports surged 62 percent to 255 tons in the fourth quarter of 2012 on expectations of higher import duties and on demand for marriages and festivals, the World Gold Council said Feb. 14. Purchases jumped 33 percent to 80 tons in January as traders rushed to beat the tax increase, Bamalwa said.

“You cannot drive away a habit that has been there for decades together,” said Chirag Mehta, fund manager at Quantum Asset Management Co.. “You have to get people off the obsession by getting gold consumption” into products such as exchange-traded funds, he said.

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