India Increases Gold Tax Third Time This Year to Cut Deficit

India, the world’s biggest gold user, raised the tax on imports for a third time this year to curtail demand and contain a record current-account deficit that’s weakened the rupee to an all-time low.

The tariffs on gold and platinum imports were increased to 10 percent from 8 percent, while the levy on silver was boosted to 10 percent from 6 percent, the Ministry of Finance said in a notification tabled in parliament today. Taxes on shipments of gold concentrates, ores and dore bars will rise to 8 percent from 6 percent, while the duty on silver dore bars will climb to 7 percent from 3 percent, the ministry said in a statement.

Finance Minister Palaniappan Chidambaram plans to curtail gold imports to 850 metric tons this year to reduce the current-account deficit and boost capital inflows by allowing state-run financial companies to issue “quasi-sovereign” bonds to finance infrastructure investments. The deficit, mainly fueled by crude oil and bullion imports, is the biggest risk to the $1.9 trillion economy, according to the central bank. The rupee fell to a record low of 61.8050 per dollar Aug. 6.

“An increase in taxes will boost local prices and increase smuggling,” said Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. “Gold imports may not be more than 150 tons in the July-December period.”

India imported 478 tons in the six months through December last year, taking full-year purchases to 860 tons, according to the World Gold Council. The government also increased the excise duty on refined gold to 9 percent from 7 percent, and that of silver to 8 percent from 4 percent, the ministry said.

Imports Halted

Spot gold fell 0.6 percent to $1,330.09 an ounce at 6:59 p.m. in Mumbai. The metal rebounded 13 percent since reaching a 34-month low of $1,180.50 on June 28. Gold for delivery in October advanced as much as 1.4 percent to 29,333 rupees ($480) per 10 grams on the Multi Commodity Exchange of India Ltd. and was last at 28,990 rupees.

Imports by banks and other traders have come to a standstill after the Reserve Bank of India on July 22 said shippers may supply gold only to the jewelry business and bullion dealers who sell to jewelers. Importers have to retain 20 percent of the gold in bonded warehouses and will be allowed to make fresh purchases only after at least 75 percent of the quantity has been exported, according to the bank.

Metal Shortage

“Government’s intention is to ensure that gold imports are reduced,” said Rajesh Mehta, chairman of Rajesh Exports Ltd. “Once the festival season starts there could be a shortage in the market. With this duty increase more imports from the legitimate channels will get into the illegitimate channel.”

Imports surged 87 percent to 383 tons in the four months through July from 205 tons during the same time a year earlier, Revenue Secretary Sumit Bose said today. Silver shipments jumped three fold to 127.9 billion rupees between April and July from 42.8 billion rupees a year earlier, the ministry said.

Consumption in India, which imports almost all the bullion it needs, accounted for 20 percent of global demand in 2012, according to data from the gold council. Bullion imports were 845 tons in the 12 months ended March 31, while silver shipments totaled 1,963 tons, according to the Ministry of Finance.

Hurting Demand

“The combination of limited imports, as local participants sort through the various regulation changes this year, higher taxes and rupee weakness make gold considerably more expensive, which would in turn hurt demand,” Joni Teves, an analyst at UBS AG in London, said in an e-mailed statement. The tax increase will further raise the incentive for unofficial flows and the government may need to start cracking down, she said.

The current-account deficit, the broadest measure of trade, tracking goods, services and investment income, widened to $87.8 billion, or 4.8 percent of the gross domestic product, in the year ended March 31 from $78.2 billion in 2011-2012, according to official data.

India may generate about $11 billion of inflows and keep the current-account gap at $70 billion, or 3.7 percent of gross domestic product, in the current fiscal year, Chidambaram said yesterday. The increase in taxes on bullion and other commodities may help garner 48.3 billion rupees, Bose said.

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