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New Delhi, Feb. 19, 2014: India is likely to cut its import tax on gold before the end of February to between 6% and 8% from the current level of 10%, a senior government official said Wednesday.
India's government had gradually raised the import tax on gold to 10% from 2% since early 2012 to bring down the country's current-account deficit. It tightened restrictions further last year by asking importers to re-export at least 20% of the gold they bring into the country.
The government is now considering reducing the import tax as the current-account deficit is estimated to have fallen by almost half to around $45 billion this financial year ending March 31 from $88 billion last year, the official told The Wall Street Journal.
On Monday, Finance Minister P. Chidambaram said that the government would review the current restrictions on gold imports.
The import curbs have led to a sharp rise in smuggling of gold through India's airports and seaports and by land from neighboring Nepal and Bangladesh. Nearly all the gold consumed in India has to be imported, and official supplies through banks have nearly dried up.
"We had hoped to get some relaxation in the interim budget as the gold industry is in coma," said Harish Soni, chairman of All India Gem and Jewellery Trade Federation. "It is quite likely that the government may still give some relief."
The shortage of gold has hit the livelihood of hundreds of thousands of small jewelry retailers and artisans employed in the industry, he said.
Mr. Soni said the government needs to relax at least some of the restrictions before early March when a code of conduct, which is enforced ahead of national elections, would prevent it from making any policy changes.
"We have asked for the import tax to be reduced by [two to five percentage points] and that the obligation for re-exports should be scrapped," Mr. Soni said.
India's gem and jewelry industry, which lost its position as the top gold consumer to China last year, is one of the country's biggest employers with a work force of around 10 million people.
Gnanasekhar Thiagarajan, director of commodities consultant Commtrendz Risk Management, said the government may cut the import tax on gold but would likely refrain from measures such as removing the re-export obligation for importers, to prevent the current-account deficit from ballooning again.
"They are likely to start rolling back other restrictions only after the elections in June," he said.