Gold Import Duty can be Hiked 3% to Rein in CAD
Rise in import duty can give a fillip to investment in sovereign gold bonds
Kolkata | Mumbai: A bid to pare non-essential imports to contain current account deficit (CAD) can boost import duty on gold by 2-3% from 10% and give a fillip to investment in sovereign gold bonds in place of physical demand in India.
“The best option for government in the present scenario is to increase the import duty on gold by 2%. The additional duty of 2% collected on physical gold can be utilised to repay sovereign gold bond on maturity to incentivise customers who have invested in gold bonds. By doing so, investment demand for gold will shift to sovereign gold bond,” said Surendra Mehta, national secretary, India Bullion & Jewellers Association (IBJA). Whil e industry watchers feel the reintroduction of Prevention of MoneyLaundering Act (PMLA) for gold could check gold demand, bullion dealers and jewellers feel
t hat with elections around the corner, thegovernmentmaynotintroduce itandthiscouldaffectgolddemand in the upcoming festival season.
The PMLA guidelines, which required jewellers to keep records of customers’ Permanent Account Number for transactions above ₹ 50,000, had a drastic effect on gold sales last year as buyers were hesitant to provide the PAN details.
Gold traders like Ketan Shroff, managing director, Penta Gold, a company listed on NSE’s SME segment, said the government could consider allowing all gold imports against letters of credit rather than on consignment basis as a method for deferred dollar payments. “The government could probably increase import duty by 2-3 odd percent but I think an expedient way to stem dollar outflow until a more lasting solution is found is for gold impor t s a g ai nst SBLCs(standby letter of credits)/ LCs of six months to one year duration rather than on
All’s Not consignment basis through banks, where immediate dollar payments are made,” Shroff said.
Throughsuchdocumentarycredit, the gold supplier’s bank discounts the LC provided by the buyer’sbankatLiborplus1%.Aftersix months or a year, the supplier’s bank receives payment from the buyer through his/her bank. This defers the outflow of dollars which currently happens under the consignment route where the nominated bank collects money upfront from the buyer and remits it to the supplier - bullion bank - for a fee. However, Shekhar Bhandari, business head (global transaction banking & precious metals) at Kotak Mahindra Bank said a more optimal solution rather than changingtheformatof paymentor raising import duty from 10% would be rationalising the duty structure on raw gold or dore, which he says makes up 55% of the gold India imports. The duty on dore is 9.35% against 10% on bullion bars imported by banks on consignment basis. Cheaper gold increases demand and this in turn widens the CAD. He said duty on dore should be brought on a par with that on direct imports to reduce pressure on CAD. Re-introduction of Prevention of Money Laundering Act (PMLA) could check gold demand
Govt could consider allowing gold imports against letters of credit rather than on consignment basis