Import duty on gold could hurt Indian jewelry businesses

Malabar Gold & Diamonds, with an annual turnover in excess of US$4.5 billion, a retail network of 250 outlets spread across 10 countries, and with over 13,000 employees, is one of the Big 5 jewelry retailers in the world. The fact that an India-based company has been able to scale global heights is a matter of pride to all Indians.

Indians are avid gold buyers, they not only consider the yellow metal as auspicious, they also value the financial stability that gold brings, both as an investment and as a hedge against lean times due to its high liquidity and portability.

On 7 May, during this year’s Akshaya Tritiya, which is considered an auspicious time to buy gold, Indians collectively bought a whopping 23 tonnes of gold on just one day, this was four tonnes more than what was purchased on the same occasion last year. And, it is not just people who are buying gold, the Reserve Bank of India (RBI) has also been on a buying spree. The RBI, which is believed to be sitting on more than 600 tonnes of gold reserve, reportedly increased its stash by a further 42 tonnes last year.

According to the World Gold Council, India has the 10th largest gold holdings in the world, nevertheless, this represents only at little over 6 percent of its total reserves. Given that gold represents nearly 70 percent of reserves in countries such as Germany and the United States there is clearly more scope for diversification of reserves to gold in India.

The affinity for gold among people is probably the reason why the Indian Finance Minister decided to increase the import duty on gold in the Union Budget for 2019-2020. To look at the repercussions the import duty on gold would have on customers, and on the gold industry in general, we talked to people-in-the-know in the gold jewelry business.

In a statement on the issue, the Group Executive Director of Malabar Group, the parent company of Malabar Gold & Diamonds, Abdul Salam K.P. said:

The Union Budget 2019-2020 will definitely help in the development and progress of rural India, however the additional import duty on gold will hurt the domestic gold and jewelry market and promote illegal trade in gold, which is detrimental to the Indian economy.

While the new duty structure will have a negative effect on the Indian jewelry industry, it will reflect positively on jewelry businesses in neighboring countries.

Even the most popular designs and artistry of India gold craftsmen will be much cheaper in the UAE, other GCC states, Singapore and Malaysia.

Earlier these markets were dependent on imports from India, whereas now most of these markets have developed their own manufacturing facilities. As the machineries and manpower are available from various parts of the world, jewelry manufacturing will move to these markets.

Customers from the subcontinent, especially from India, will be able to take advantage of the price difference prevailing in nearby countries.

The revised duty structure will lead to customers benefitting more than Rs400 per gram on gold purchases from GCC countries. This will definitely encourage bulk buyers, especially on wedding related purchases, to visit Dubai or any of these markets. If a family of four visit and bring back ornaments on a reasonable allowed quantity, they can cover their trip cost easily. They also will have the additional benefit of a much wider choice from international jewelry designs.

Current price difference is mostly on account of 12.5 percent custom duty and 3 to 4 percent other taxes. Whereas in GCC countries, gold bullion is zero rated, and the GST charged in many countries are refunded to the tourists, thus practically there is no duty or tax on the purchases made by them.

The increase in import duty from 10 percent to 12.5 percent will also affect the import of jewelry from different parts of the world into India. This will affect availability of internationally designed and manufactured jewelry in India. Customers will therefore find a much larger array of designs and jewelry in markets like GCC, Singapore, Malaysia and Sri Lanka.

The price advantage of 10 – 12.5 percent, along with the VAT refund for tourists, which result in NRIs and tourists buying gold from neighboring countries.