The Indian government has been tinkering with gold import duties, ever since the huge import quantities of the precious metal caused significant trade imbalances. Heavy rise in imports has become a cause for concern, and time and again it has been said that gold imports should come down if India is to become an attractive destination for investments. High gold imports is aggravating the trade deficit and the current account deficit which has now reached 5.4% of the GDP. The import duty on Gold are being revised systematically so that the imports can be controlled.

Further increase is possible in this budget. However, still the imports maintained a decent pattern on the upside. The reasons behind steady imports even after the hike in import duties have been the early harvest schemes of India with Thailand. The Gold importers are routing this commodity from Thailand and are saving big time on custom duties. Government has now found this as a loophole and has discontinued the imports of Gold from Thailand to India.

What is the early Harvest Scheme?

This scheme was started in 2004 between India and Thailand. The key purpose of the scheme was to enter a Free-Trade Agreement (FTA) in goods, services and investment. Under the scheme, a common list of 84 items of trade between the two countries was agreed on which the tariff concessions were given. Gold imports from Thailand attracted a marginal import duty of 1%.
Concessional Duty Agreement was misused
The concessional import duty of 1% was getting misused by the exporters of different countries as well as by local importers who were saving money on importing Gold from Thailand. The standard trade of Gold attracts an import duty of 10% while from Thailand, it was just 1%. The idea behind FTA in Gold was that the value addition will be done in Gold coming from Thailand, which is being sold in India. However, lately the government discovered that the Gold was imported from Thailand ignoring the rules and minimum percentage of change set by the policymakers.

Government of India Stance

Department of Commerce has asked the Department of Revenue to suspend the import of Gold from Thailand in order to check the heavy rise of imports through that route. The Department of Commerce has asked to issue a notification immediately to suspend the import of gold jewelry under the early harvest scheme until the time certificates of origin that will be issued by Thailand Government will be verified by Indian authorities. The total imports of Gold jewelry from Thailand into India were $92 million between April-November 2012.

Gold levy might increase in this budget

Before the Union Budget 2013, calls are growing that the gold import levy will increase to 8%. The entire Gold import in the country is the cause of 80% of the total trade deficit that is inducing pressure on the government to increase the import duties further from existing 6%. Even in the last few days before the budget expectations are that imports into India will pick up pace on the back of heightened expectations of the import duty hike to 8%.

Gold imports up 62 percent in fourth quarter

Total Gold demand from India was 26% of the world demand. Imports have been on the rise according to the recent reports. The total imports in the country were 255 tonnes, up to 62 percent in the fourth quarter ending 31 Dec 2012.
After the move by the government to suspend the imports from Thailand and hearsay that the import duties will increase in the country to 8% in the budget 2013, chances are that the demand for Gold will get tampered down.

About the author:
Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at amvilube@gmail.com

Courtesy: www.investmentyogi.com