The Hindu Business Line : A case for Govt to hike Customs duty on gold

FOR the Finance Minister straining to raise revenue for the exchequer, gold may come in handy. There is a case for raising Customs duty on gold imports.

Currently, the duty is Rs 100 per 10 gram. The Finance Minister can potentially mop up a few hundred crore rupees as additional revenue if the duty is raised modestly.

Consider this. Average price of gold in the international market was $310 per ounce during 2002. In the Budget presented on February 28, 2003 the then Finance Minister reduced duty from Rs 250 to Rs 100 per 10 g on serially numbered bars of 100 g or its multiples.

In 2003, gold prices averaged $364/oz in the international market and during 2004, average rates were further up to $410/oz. Domestic prices too have been markedly higher following the increase in the international market.

However, domestic prices did not show a proportionate increase because of steady appreciation of the rupee vis-à-vis the dollar.

While the international gold market gained as much as $100 an ounce over the last two years, the domestic market saw prices spurt by roughly 10 per cent or around Rs 500 per 10 g.

Demand for gold continues to be robust, driven by strong GDP growth of over 8 per cent in fiscal 2003-04 and an estimated 6.5 per cent in the current year.

At Rs 100 per 10 g, the Government earns Rs 600 crore as Customs duty on import of 600 tonnes of gold. Even at the current high price of around Rs 6,000/10 g, demand for gold is still good. Rising incomes have made gold affordable to large sections of the population, even at higher prices.

While it is safe to assume imports would continue at 600 tonnes a year, an increase in the existing rate of duty would fetch additional revenue.

For example, a duty increase of Rs 10 per 10 gm of imported gold would yield Rs 60 crore as revenue and an increase of Rs 50 per 10 g would result in additional revenue of Rs 300 crore. Will there be consumer resistance? Most consumers seem to have got used not only to price volatility but also to the current high prices.

Therefore, the negative effect of a hike in duty on demand would be marginal, if anything.

A liberal import policy has ensured comfortable availability of the yellow metal.

An increase in duty is most unlikely to encourage unauthorised imports, for the costs associated with such arrangement are far higher. The poor risk-reward profile would dampen any such misadventure.

Gold producers and overseas suppliers who have got used to a growing Indian market may resent any hike in import duty on gold and raise a hue and cry about the possibility of smuggling; but it can be ignored.

Interestingly, it was only a few days ago that producers protested against the proposed sale of IMF gold reserves to fund debt relief for the world's poorest countries.

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