Time for Rethink on Import Duty on Gold

13th March 2014: Gold demand in India is expected to be robust in 2014 and is likely to encourage an increase in smuggling if curbs on bullion imports remain, the World Gold Council (WGC) has said. Ignoring this warning, the government has tightened norms for Indians bringing gold into the country following a spurt in smuggling and pressure on inward remittances as overseas workers prefer to bring their savings in gold. In a recent interview, the chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, has justified high customs duty, adding that there is a higher customs duty on other luxury goods. This argument does not hold water.

Gold should not be seen purely as a luxury good. For many it is seen as a crucial hedge against inflation, in the absence of deep and trustworthy financial markets. Secondly, unlike other luxury items such as Mercedes cars, gold is easy to smuggle. The memory of the 1970s and 1980s, when smuggling of the yellow metal thrived, should serve as a warning against continuing with a 10 per cent import duty on gold imports. A prohibitively high duty on gold imports should not be considered a semi-permanent measure. This would only incentivise smuggling, with the consequent costs in terms of criminality. Sound economic thinking requires that the government set a duty for gold by comparing it not to “luxury items”, but in a way that the profits from smuggling large amounts of gold do not outweigh the costs. By some estimates, 150 to 200 tonnes of gold have already been smuggled in. Smaller neighbouring countries have also seen a spike in their gold imports, a sure sign that smuggling into India is on the increase. It is vital that gold duties come down to a more reasonable level before these incipient smuggling networks become entrenched.

It is time for a rethink on the import duty on gold. The rampant smuggling would predictably come down once gold duty is cut. But if the finance minister statements are anything to go by, this is unlikely to come about at least in the time preceding the general elections.

Courtesy: The New Indian Express