The central government's decision to raise basic import duty on gold to 12.5% from 7.5% will cause a rise in retail gold prices and chances of increased gold smuggling into the country, say industry sources.

"The increase in import duty on gold from 7.5% to 12.5% aims to reduce gold imports and ease macro-economic pressure on INR. However, overall taxes on gold now rise sharply from 14% to around 18.45% and unless this is tactical and temporary, this will likely strengthen the grey market, with long term adverse consequences for the gold market," says Somasundaram PR, regional CEO, India at World Gold Council.

India's gold demand is largely met through imports, which, at times when INR faces some weakness, exacerbates the issue. INR exchange rate touched a record low earlier this week amid higher inflation and expanding trade imbalances, he noted.

Gold attracts 3% Goods and Services Tax (GST) and agriculture infrastructure development cess (AIDC) of 2.5%. This will effectively cause imported gold prices to rise by ₹2.25 lakh rupees per kilogram. India imports most of the requirements. Retailers are likely to pass on this to consumers and retail gold prices may go up by ₹800-1000 for 8 grams of gold in jewelleries, say sources.

India, the world's second-biggest gold consumer after China, had imported gold worth $46.14 billion during 2021-22, 33.34% higher than the USD 34.62 billion imported in 2020-21. Gold imports were recovering after being badly affected during the Covid-19 lockdown period.

Sources say the hike in customs duty may also cause an increase in gold smuggling into the country. According to the current international gold prices, importers will have to pay more than ₹8 lakh as taxes to import one kilogram of gold into the country. Estimates say gold smuggling rackets bring more than 200-300 tonnes a year into the country and this may further go up by 20-30%, they say.

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