Gold Bullion Duty Raised in India, Refiners Gain Edge

IMPORTS of Gold Bullion to India – the world's No.1 consumer – have begun 2012 with a doubling of tax duties.

India has no domestic gold-mining output, and so relies on foreign imports plus "scrap" flows of resold metal to meet its world-beating demand. Falling 8% in 2011, imports of Gold Bullion still led the world, totaling some 878 tonnes according to the Bombay Bullion Association.

Import duties were last hiked in early 2010, and Indian gold prices have since risen 28% to a series of record highs. This week's announcement, according to the Mumbai press, is aimed at raising government revenue, stemming the Rupee's sharp fall on the forex market, and also favoring the domestic refining industry.

"The revenue authorities are expected to rake in an additional 600 crore Rupees [$120m] during the fag-end of the current financial year" – which will end March 31st – said one senior official quoted by India Today.

"At the same time, [the move will] discourage imports so that the Rupee steadies against the Dollar."

Indian households' strong demand for physical Gold Investment and jewelry hit 2.6% of the country's GDP in 2010. Rising to some 3.0% in 2011, the total current account deficit was seen as a key driver of the Rupee's sharp losses, down some 12% against the US Dollar last year to all-time record lows.

"The decision will help improve the efficiency of domestic refineries that were operating at 25-30% [of capacity] and running into losses," says Mumbai refinery manager Harmesh Arora of NIBR Bullion. Because while the new regime takes import duty on refined Gold Bullion from 300 Rupees per 10 grams to a value tax of 2% – effectively twice the old rate – a quick amendment announced just one day later  means "raw gold" concentrate costs half that rate.

"Indian refineries will now find import of gold concentrate economical."

Refineries in Europe – source of much of the Gold Bullion imported to India, most notably through Switzerland – charge some $1000 per kilo according to the Business Standard, equivalent to 1.5% of Spot Gold prices today.

India's domestic refineries charge only one-tenth as much, says the paper.

Even excluding imports, "With the new duty structure more gold refined in the country will be available," says the Business Standard, explaining that domestic flows of scrap gold – required by refineries previously enjoying no duty advantage over bullion – were dented by India's recent introduction of mandatory hallmarking on jewelry.

Consumers looking to raise cash are simply selling hallmarked pieces direct to jewelers who then sell them again, rather than sending them for refining together with other items. After recycling 81 tonnes of Gold Bullion in full-year 2010, India's refineries produced only 35 tonnes in the first nine months of 2011 according to World Gold Council data.

India has also raised import duties on Silver Bullion, effectively doubling the effective rate from a flat fee to 6% by value.

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