Customs duty reduction impact: How gold prices may perform in the near future

Gold has long been viewed as a great investment asset in not only India but throughout the world. The precious metal has historically delivered consistent and impressive returns, making it the cornerstone of many well-diversified investment portfolios. 

In addition to being an attractive long-term investment option and a hedge against economic uncertainties, gold forms a major part of most Indian households in the form of jewelry and ornaments. Such reverence and popularity are some of the many reasons why gold is often among the most tracked assets in the world. 

Since India is not a major producer of gold and considering the exceptionally high levels of demand for the precious metal, the country turns to imports to satisfy the need. This attracts a host of indirect taxes, with customs duty being one of the major ones. 

The final price of gold in India is arrived at after factoring in all taxes, including customs duty. This is one of the many reasons why the price of gold fell when the government of India, in the Union Budget 2024 proposed to cut customs duty on gold and silver.   

An Assessment of Customs Duty and Other Indirect Taxes on Gold

Before we look at the impact of the reduction in the import duty for gold, it is important to first understand the rate of duty to which the metal was subject.

Until the day of the Budget 2024 announcement, gold carried a basic customs duty (BCD) of 10% and an Agriculture and Infrastructure CSS (AIDC) of 5%. In addition to this, Goods and Services Tax (GST) was also levied on physical gold at 3%. All of this led to a total tax of about 18% on gold. 

The cumulative effect of all of these taxes significantly increased the effective cost of gold for end consumers. This led to a call by the concerned stakeholders, who urged the government of India to consider lowering the duty on gold imports.     

Budget 2024: Revision in the Customs Duty and Other Indirect Taxes on Gold 

Over the years, the government of India has focused on curbing the import of gold by increasing duties and taxes. The rationale behind this was that gold, along with crude oil, were among the top contributors to the country’s current account deficit. The levy of high import duty on gold was one of the ways in which the government hoped to curb imports and reduce the widening of the current account deficit.     

However, the Union Budget 2024, presented on July 23, 2024, brought about significant changes to the taxation structure for gold. This marked a pivotal shift in the government's approach towards this precious metal. The most notable change was a substantial reduction in the customs duty on gold imports, a move that sent ripples through the entire gold ecosystem and the financial markets.

In a dramatic move, the government of India cut the basic customs duty on gold down to 5%, a 50% reduction from the erstwhile 10%. Similarly, the Agriculture and Infrastructure CSS (AIDC) was slashed to just 1%, a massive 80% reduction from the erstwhile 5%. This brought down the current import duty on gold to just 6% (BCD of 5% + AIDC of 1%). Along with a 3% GST, the total taxes on physical gold now stand at just 9%, compared to the previous 18%.  

One of the major factors that influenced this shift in the government’s stance on gold was the ever-increasing incidents of illegal gold smuggling. According to the data, around 100 tones of gold were illegally smuggled in 2022, which increased to 155 tones in 2023. However, with the cut in customs duty on gold of more than 50%, the price difference in gold between India and other foreign countries has dramatically decreased. This is likely to lead to a drastic reduction in illegal imports over the long run.     

The Impact of the Reduction in Customs Duty on Gold 

The reduction in customs duty on gold imports, as announced in the 2024 budget, has set in motion a series of effects that are reshaping the entire gold market landscape. These impacts can be observed in both the near term and potentially over the long run. 

The most notable impact on gold prices was on the day of the Union Budget 2024 presentation. As investors and stakeholders realized that the tax burden on gold had been reduced by more than half, the markets witnessed a sharp decrease in domestic gold prices by about 7%. On a similar note, gold Exchange-Traded Funds (ETFs) that track the price of physical gold also dropped by around 6.5% to 8.9%. 

The sudden drop in prices also triggered a surge in gold demand among consumers who were previously priced out of the market or waiting for a more favorable price point, seizing this opportunity to make purchases, particularly for jewelry. The increase in demand for gold is likely to persist in the near future, which can lead to a slow growth in the price of the precious metal.

There are other factors at play that are also expected to provide support for gold prices in the near term. The war between Russia and Ukraine, for instance, is taking a major turn with the latest Ukrainian incursion into Russia’s Kursk region. The mounting tensions are likely to push investors towards gold, which is often considered to be a safe haven. 

Additionally, if the U.S. Federal Reserve decides to cut interest rates, which experts believe might happen in September, the dollar may face a decline. This could also nudge investors towards gold, pushing the price upward. 

Conclusion

The reduction in customs duty on gold, as implemented in the 2024 budget, has set the stage for a potentially transformative period in the gold industry. Looking ahead, the near-term impact of this cut on gold prices is seemingly positive. The increase in demand for the precious metal from Indian households is expected to support and maybe even push prices upward. 

The long-term implications of the reduction in import duty for gold are more challenging to predict. This is primarily because the performance of gold prices in the long term will not be determined by the cut in duties alone. Other factors, like global economic conditions, geopolitical events, currency fluctuations, and broader market sentiments, will also come into play. However, considering the current economic and political scenarios in the world, it seems like the price of gold will continue its upward trajectory. Long-term investors in the asset could potentially use these corrective phases to accumulate more quantities of the metal at attractive prices.

With the current import duty on gold being very attractive and pushing domestic demand for the metal upward, the Indian jewelry sector is likely to benefit from increased sales and potentially higher profit margins. If you are looking to include some market-linked investments in your portfolio, now may be the right time to invest in some jewelry stocks. 

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