India cuts import tax on gold, industry expects drop in smuggling

Customer looks at gold earrings at a jewellery showroom during Dhanteras in Mumbai

By Rajendra Jadhav

MUMBAI (Reuters) - India slashed import duties on gold and silver on Monday in a surprise move that industry officials say could boost retail demand and curtail smuggling in the world's second-biggest bullion consumer.

Higher demand for gold from India could support global prices, which hit a record high last year, although that could increase India's trade deficit and weigh on the ailing rupee.

India cut import duties on gold and silver to 7.5% from 12.5%, but imposed a 2.5% cess - a separate tax - on the imports, Finance Minister Nirmala Sitharaman said.

After the changes, gold imports would effectively attract 10.75% tax against 12.5% earlier, said Somasundaram PR, the managing director of the World Gold Council's (WGC) Indian operations.

"Hopefully, this is the first of a series of such cuts to make bullion an asset class that operates mainstream," said Somasundaram.

India raised import duty on gold in 2019 to 12.5%, which industry officials said boosted smuggling of bullion into the country and hit banks and bullion dealers that were paying the duty.

"Higher import duty was not only indirectly promoting illegal gold transactions but also eroding government's revenue," said Ahammed MP, Chairman, Malabar Gold & Diamonds.

Up to 120 tonnes of gold was smuggled into India in 2019, according to the WGC.

Gold prices have come down with the duty cut and this will boost retail demand, said Prithviraj Kothari, managing director of RiddiSiddhi Bullions.

Gold futures fell nearly 4% after the announcement to 47,200 rupees per 10 grams, the lowest in over 7-months.

India also cut import duty on gold dore, or non-refined mined gold, to 6.9% from 11.85% and to 6.1% from 11% on silver dore, Sitharaman said.

Shares of jewellery makers such as Titan, P C Jeweller and Tribhovandas Bhimji Zaveri Ltd closed up as much as 8.8%.

(Reporting by Rajendra Jadhav; Editing by Kim Coghill and Mark Potter)