A hike in taxes on gold sales in India could stoke under-the-counter buying and drive up appetite for precious metal smuggled into the country, where millions of people store big chunks of their wealth in bullion and jewellery.
As part of a new nationwide sales tax regime that kicked in on July 1, the Goods and Services Tax (GST) on gold has jumped to 3 per cent from 1.2pc previously, with traders and buyers saying the move will likely force more transactions into the black market.
“Three per cent is too much. I preferred to buy without receipts. The jeweller did not have any problem,†said a middle-aged buyer, who declined to be identified after making purchases on Monday at the country’s biggest bullion market, Zaveri Bazaar in Mumbai.
Smaller shops could be more inclined to sell without receipts, potentially hitting sales at big jewellers that keep to the rules, said Harshad Ajmera, the proprietor of JJ Gold House, a wholesaler in the eastern Indian city Kolkata.
“Just to save 1pc, some customers were earlier buying gold without receipts. With the 3-pc GST, now many more will be tempted to make unofficial purchases from small jewellers,†Ajmera said.
The tax hike could also encourage more smuggling into the world’s second biggest gold consumer, which buys almost all its bullion abroad.
Gold smuggling has been rife since India raised import duties on the metal to 10pc in a series of hikes to August 2013, looking to curb demand to narrow a gaping current account deficit.
The World Gold Council estimates smuggling networks imported up to 120 tonnes of gold into India in 2016.
“The GST rate has increased the incentive to bring in smuggled gold. The government should reduce import duty and make smuggling unviable,†said Aditya Pethe, a director at Waman Hari Pethe Jewellers in Mumbai.
The country’s legal imports typically stand at around 800 tonnes a year, with the metal used in everything from investment to religious donations and wedding gifts.
“A lower import duty would increase legal imports and ultimately legal sales. Tax revenue would go up instead of going down,†said Daman Prakash Rathod, director at wholesaler MNC Bullion in the southern city of Chennai.
Shares see little change, investors see profit
Indian shares swung between gains and losses on Tuesday, after rising more than 1pc in the previous session, as investors booked profits in recent outperformers such as ITC Ltd, although energy firms gained on lower oil prices.
Indexes had risen for three consecutive sessions as consumer goods firms rallied on hopes of reaping benefits from the Goods and Services Tax, which replaced more than a dozen federal and state levies.
“GST positivity still weighs on the market. Some traders are now looking for bargain buying, while other are booking profits after sharp gains from yesterday,†said Anand James, chief market strategist at Geojit Financial Services.
The broader NSE index was down 0.07pc at 9,607.55 as of 0635 GMT while the benchmark BSE index too was 0.07pc lower at 31,199.27 recent gainers led the declines. Cigarette maker ITC Ltd , which hit a record high and drove the markets higher on Monday, was down 0.79pc.
The Nifty Auto index was down 0.62pc, with Hero MotoCorp Ltd and Bajaj Auto Ltd sliding 1.7pc and 1.05pc respectively.
Meanwhile, commercial vehicles maker Ashok Leyland , which hit its highest in a year on Monday, was down 1.05pc.
Among gainers, energy stocks led, with Reliance Industries Ltd and Bharat Petroleum Corp Ltd climbing more than 2pc each after oil prices retreated, halting a straight eight-day run of gains on signs that a persistent rise in US crude production is running out of steam.
The Nifty Energy index was up as much as 1.52pc, its biggest intraday percentage gain in almost three weeks.