High import tariff adding fillip to illicit gold trade

New Delhi [India], January 27 (ANI/Mediawire): Raising import duty on gold serves as an incentive for smugglers. Lowering the duty gradually could help grow the organised trade.
Gold prices have been sky-high since the early days of the COVID-19 pandemic. With the government having recently increased import tax on the precious metal, consumers will have to shell out more for the purchases of their favourite metal.
The hit for be harder for those who invest in gold bars or gold exchange traded funds or event trade in them. In the current times of high inflation, it has served as a hedge and a good investment option. With the government taking measures to address the decline of the Indian currency, by raising the import tax on gold will give rise to trading through illegitimate means.
Smuggling on the rise
According to Directorate of Revenue Intelligence's (DRI) Smuggling in India Report 2021-22 report, it is estimated that about one-sixth of the total amount of gold entering India is done through illicit trade. Back of the envelope calculations suggest that India's consumption of gold is around 1000 tonnes per year. Annual imports hover around 800-850 tonnes. That suggests about 150 to 200 tonnes is being smuggled into India each year. The higher the import tax, the great is the incentive for the illicit trade to thrive and cause a loss to the government.

In the 1990s, the Gold (Control) Act of 1968 was repealed, which had previously prohibited the import of gold other than for jewellery. During the 1970s and 80s, due to the erstwhile statute a notorious network of gold smugglers was created.
A specific duty of Rs 300 per 10 grams on imported gold in 2011-12, an increase from Rs 200 in 2010-11. Economy watchers suggest that this brought gold smuggling almost to a halt.
The duty rate was enhanced in 2013, essentially to rein in the spiralling current account deficit, when the rate was shifted from specific to ad valorem and within a span of two months, the duty on gold increased nearly four-fold to 4 percent. Currently, gold imports are subject to a 15 percent duty as well as a 3 percent GST for making gold ornaments. The increased duties on imported gold have created an incentive for gold smuggling.
According to the World Gold Council, in fiscal year 2019-20, 120 tonnes of gold were smuggled into India, which accounted for 15-17 percent of the annual demand.
India's official gold import
Gold imports through legitimate channels, result in a significant outflow of foreign exchange, have been increasing. Imports for 2021-22 were reported to be worth Rs 3.44 lakh crore, an increase from Rs 2.54 lakh crore in 2020-21, and Rs 1.99 lakh crore the year before.

India is the world's second-largest gold consumer after China and, according to the World Gold Council, its consumption for 2021 was 797.3 tonnes - the highest in the last five years.
While the government needs to manage its current account deficit, the high import duty that comes with it can encourage gold smuggling and inhibit the growth of legitimate gold retailers.
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