Thursday, October 28, 2010

Import duty on gold, silver must be hiked

Exchequer can mop up Rs 800 cr additional revenue.

A strong case for an upward revision in Customs duty on imported gold is emerging.

The Exchequer can mop up an additional revenue of Rs 800 crore on imported gold.

Following steady surges in the international market, driven primarily by huge flows of speculative capital, prices of the yellow metal have reached record highs recently and stand at over $1,300 an ounce currently.

On the global futures exchanges, speculative long positions have reached record levels, indicating that the market prices are far removed from demand supply fundamentals.

The sentiment is decidedly bullish with experts sanguine about the precious metal touching $1,400/oz.

Global prices

The international price changes are reflected in our domestic market where gold is currently trading in the range of Rs 19,500-20,000/ 10 gram. In the last eight months, gold prices have spurted by over 30 per cent.

At the time of last Union Budget, gold prices were around Rs 16,500/10 gm (up from Rs 14,000 a year earlier) as a result of which customs duty on gold was raised to Rs 300/10 gm from the earlier Rs 200/10 gm.

After weak protests by a section of traders - essentially speculators on the bourses - the issue died down. Consumers accepted the new reality of a slightly higher duty. It is time to visit the customs duty matter again. Indeed, there is a case for hiking customs duty on gold to Rs 500/10 gram.

Actual consumers will have no reason to complain. Anyone who can afford to pay Rs 20,000/ 10 gm of gold can afford to absorb a slightly higher customs duty.

In fact, the hike from Rs 300 to Rs 500 will only mean an increase of Rs 200/10 gm, that is a mere one per cent of the value; but will generate an additional revenue of Rs 800 crore and total revenue from gold imports (assuming physical arrival of 400 tonnes) would be Rs 2,000 crore.

Silver scene

Silver's case is equally compelling. Earlier this year in February, silver was trading at Rs 25,000/kg, having risen from Rs 21,000/kg a year earlier. Import duty on silver was raised by Rs 500-1,500/kg as part of budget proposal.

Current prices are around Rs 35,000/kg. Therefore, hiking the customs duty to Rs 2,000/kg would make eminent sense for the Government to garner additional revenue.

On import of an estimated 1,500 tonnes of silver, additional revenue of Rs 750 crore can be generated. As we have argued in these columns in the past, it is necessary to utilise apart of revenue generated for reforming and strengthening the bullion sector including training of artisans and small goldsmiths.

Speculation in the marketplace deserves to be curbed as it hardly adds economic value. In anything, a transaction tax on gold and silver trades on the bourses should be the first step to curb the speculative fervour and reform the market.

There are serious reservations about the purity of gold going around.

It is a huge challenge to ensure unwary customers are not short-changed.

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