The Indian government’s sustained campaign for improving overall tax compliance through a carrot-and-stick policy was reflected again in the 2021-22 Union Budget, with a few material announcements that impact gold. Key highlights from the Union Budget announcement on 1 February are:
a reduction in gold import duty
the authorisation of the Securities and Exchange Board of India (SEBI) as regulator for domestic gold spot exchanges
the establishment of welfare schemes for rural areas designed to boost incomes.
The lower import duty will likely enhance consumer demand and discourage unofficial imports. Oversight by SEBI may spur infrastructure development and likely lead to higher trading and more effective gold price discovery. And the rural welfare schemes may indirectly support gold demand through income growth.1 We believe that this, combined with better gold policies, could bode well for India’s gold industry in 2021 and beyond.
Finance Minister Ms. Nirmala Sitharaman outlined key announcements with relevance to the Indian gold market during her annual budget speech:2
- In the Union Budget of 2018-19 the government had indicated its intention to establish a system of regulated gold exchanges, and the current budget authorised SEBI as the regulator. It also expanded the responsibilities of the Warehousing Development and Regulatory Authority to include a commodity market eco-system, embracing vaulting, assaying and logistics, as well as warehousing.
- The current budget lowered custom duty on gold bars and gold doré in light of the significant increase in the gold price since the duty was last raised (from 10% to 12.5%).3 The various changes to the components of import duty and rates are as follows:
a) Basic Customs Duty (BCD) on gold bars and gold doré is reduced to 7.5% and 6.9% from the previous level of 12.5% and 11.85%, respectively
b) To improve agricultural infrastructure, an additional Agriculture and Infrastructure Cess (AIDC) is levied on several items, including gold bars and gold doré, at a rate of 2.5%.4
c) The Social Welfare Surcharge (SWS) is imposed on BCD at 10% for gold bars and gold doré but will not be applied to AIDC.
- The pre-trial for disposal of seized gold is to be revised. Expediting such disposals will likely increase the cost of gold seizures and discourage smuggling.