Gold import duties, smuggling and gold seizures

In February 2021, India's Finance Minister announced cut in import duties on gold from 12.5% to 7.5% albeit effective import duty remained 10.75% after imposition of various cesses, surcharges and a 3% GST.. ThePrint’s Editor-in-Chief Shekhar Gupta explains what the small cut in import duty tells us about the Indian political system’s fatal attraction for bad policy.



On 13 August 2013, the Indian government had raised gold import duty from 6% to 10% which was further raised to 12.5% on 5 July 2019. For taxes and gold import duties over 12.5% gold smuggling becomes a lot more profitable than imports creating a very strong incentive for the grey markets to constantly undermine all reforms to make gold liquid and mainstream according to the World Gold Council. India has had a significant history of seizure of smuggled gold which is directly proportional to the amount smuggled rising from 207% from 2016 to 2020. Nearly 70% of total gold seizures made in 2020-21 were of Myanmar origin. Only about 13% came from the United Arab Emirates.

According to Gupta, in the past, gold was smuggled in large quantities as it funded all of India’s underworld and corruption — bureaucratic corruption, customs corruption, judicial corruption as well as terrorism. “Gold is a sink for black money. One way to clean up gold was to open its imports. Second was to reduce or withdraw all duties so that the margin was taken away. And third was to improve India’s foreign exchange rules” Gupta explained.

Improved Gold price discovery may lead to even higher imports into India

Qualified Indian gold jewelers and bullion dealers are now authorized to buy gold bars and coins directly via imports from the India International Bullion Exchange (IIBX). At present, gold imports are allowed only through Reserve Bank of India nominated banks and India's Directorate General of Foreign Trade licensed entities such as the State Trading Corporation (STC) of India to import gold in the form of the more popular 100 gm and 1 Kg bars with 0.995 (67%) and 0.999 (33%) purity, for Indian traders or jewellery manufacturers on consignment basis. Gold officially shipped into India comes via air into 11 cities as well as a Free Trade and Warehousing Zone (FTWZ), located in the town of Satyavedu. Indian gold imports have continued to rise despite high import duties with official imports averaging 760 tonnes per year since the first hike in 2012. In 2016-2020, imports made up 86% of India’s gold supply while recycling accounted for 13% and mining accounted for just over 1%. Since the first duty hike in 2012, India has imported some 6,581 tonnes of gold - rising from $37 billion worth in 2018, 377 tonnes in 2020 reaching a record $55.7 billion in 2021 buying more than double 2020's tonnage, as a price drop favoured retail buyers and pent-up demand emerged for weddings that were delayed when the pandemic first hit.
The ownership of the imported gold vests with the overseas exporter until its agent in the country (e.g. authorized banks) sells it to a domestic buyer. The banks and other agencies get a fee from the exporter for handling and storage and also add a premium to the gold while transacting with the domestic buyers. The buyers pass this premium on to the value chain until it reaches the end customer, who has little knowledge of the gold’s price discovery with price quotes for the gold across the country being opaque. The premium charged was up to $1 an ounce over official domestic prices in January 2022 (inclusive of 10.75% import and 3% sales levies) as opposed to $5 discounts in December 2021, which were the largest in five months.

Gold imports continue to rise (and shine) in the world's second largest gold consumer market

India imported gold worth $34.6 billion in 2020 against $28.2 billion in 2019 with Swiss gold imports accounting for almost half at $16.3 billion. According to Bloomberg, India's gold imports at 900 tons in 2021, up from 350 tons in 2020 are set to be the highest in six years:

India is the world’s second-biggest gold consumer and imports almost all the metal it consumes with the World Gold Council has estimating that sales in the peak October to December period to be the best in at least a decade. The Securities and Exchange Board of India has allowed setting up Gold Exchanges from 2022 where trading in the form of electronic gold receipts (EGRs) at the excahnge is expected to help with a transparent domestic spot price discovery mechanism. The denomination for trading of EGRs and conversion of an EGR into gold is left to the exchanges but EGR trading will be subject to securities transaction tax and goods and services tax.The Directorate General of Foreign Trade issues license to entitities such as the State Trading Corporation (STC) of India to import gold in the form of 100 gm and 1 Kg bars with 0.995 and 0.999 purity, for Indian traders or jewellery manufacturers.