Indian Gold Import Duties Slashed to Lowest Level in Over a Decade

Indian Gold Import Duties Slashed to Lowest Level in Over a Decade

In a historic move set to reshape the gold market, the 2024-25 Union Budget has dramatically reduced gold import duties to their lowest level in over a decade. This policy shift promises to have significant implications for India's gold industry, promoting organized growth and curbing illegal trade.

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• Gold import duty was cut by more than half in the most recent Union Budget
• Long-term capital gains tax on gold was adjusted down and the holding period decreased
• Profits on gold ETFs and mutual funds will no longer be taxed at the short-term capital gains rate if held for at least 12 months
• Despite some potential short-term disruptions, we expect the combined effects of these changes to add at least 50t to gold demand in H2 2024.

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Major Policy Shift in Gold Import Duties

The Union Budget announced a sweeping cut in import duties, reducing the total customs duty on gold from 15% to 6% and on gold doré from 14.35% to 5.35%. This marks the sharpest reduction on record and the lowest duty since June 2013. The reduction is effective from July 24, 2024.

Transformative Changes in Gold Investment Taxes

Additionally, the holding period for long-term capital gains on gold has been reduced from 36 months to 24 months, with the tax rate slashed from 20% with indexation to 12.5% without indexation. This change is applicable from July 23, 2024.

Gold ETFs and mutual funds have also been recategorized. The new definition excludes gold ETFs from the "Specified Mutual Funds" category, which means they will be taxed as long-term assets if held for more than 12 months, at a lower rate of 12.5%. This amendment is set to take effect from April 1, 2026.

Implications for the Gold Market

The reduction in import duties is expected to:

• Curb Gold Smuggling: By making official imports more cost-effective, the incentive for illegal trade diminishes.
• Lower Landed Cost of Gold: This will enhance the competitiveness of the domestic gold industry and free up working capital for exporters.
• Boost Gold Jewellery Production: The government anticipates increased employment in this labor-intensive sector due to lower production costs.

However, there may be short-term inventory losses for bullion dealers, manufacturers, and retailers, but these are expected to be offset by rising consumer demand driven by lower prices.

Impact on Gold Demand

The duty reduction could significantly increase gold demand, especially during the upcoming buying season between August and December. Econometric models suggest an additional 50 tonnes of consumer demand in the latter half of 2024. Moreover, the recategorization of gold ETFs is likely to improve investment flows, making gold a more attractive investment option.

Initial Market Reaction

Following the budget announcement, domestic gold prices fell by 7%, reflecting the lower duty, while gold ETF NAVs dropped by 6.5%-8.9%. Retail jewellery shops reported a surge in foot traffic, and local gold prices started trading at a premium after months of discounts compared to international prices.

Key Points:

• Historic Reduction: Import duties on gold cut from 15% to 6%, the lowest since June 2013.
• Tax Reforms: Long-term capital gains holding period reduced to 24 months, with tax rate cut to 12.5%.
• Investment Incentives: Gold ETFs recategorized to benefit from long-term capital gains tax.
• Market Impact: Anticipated boost in gold demand, reduced smuggling, and increased competitiveness in the domestic market.
• Initial Reaction: Significant drop in gold prices and increased retail activity post-budget.