In 2012, January gold import duty raised by 2 percent. However, in 2013 the United Progressive Alliance second term raised three times and set import duty at 10 percent in August 2013.
Gold traders were caught by surprise after the first Budget of the Narendra Modi 2.0 regime increased custom duty on gold imports by 2.5 percent. Especially so, because custom duty has been increased after almost six years, during which time it was stagnant at 10 percent.
In fact, gold traders had been demanding a cut in duty rates. Even the commerce ministry had proposed a cut in gold import duty.
"The increase in the import duty is a surprise," Kishore Narne, Head of Research - Commodities, Motilal Oswal, told Moneycontrol.
He, however, added that he is bullish on prices of gold and that this announcement was unlikely to rein in the recent rally in gold prices. "We are expecting gold to touch Rs 36,000 this year."
Traders are not amused.
"The entire gold sector was expecting a duty cut to stop illegal entry of gold in the country, the unexpected duty rise of 2.5 percent in the Budget will add fuel to the fire," Surendra Mehta Secretary, Association Indian Bullion Jewelry (IBJA), the lobby body representing Asia’s largest gold market Zaveri Bazaar told Moneycontrol.
"This move will widen the gap between honest and dishonest players. The least we expect is that the govt must ensure a strict vigil on the borders to completely stop illegal entry of gold in the country which will result in entire duty being collected. Of course, we are not aligned to other countries of the world where duty is zero."
Even gold companies are also not happy with this move.
"The imposition of a hike in customs duty on gold and precious metals will have a dampening effect on the market. However, the push for digitalization and the shift to a cashless economy will strengthen the hand of organized players in the industry, creating transparency and positively impact market sentiment," Saurabh Gadgil, CMD, PNG Jewellers, said.
"The introduction of zero tax liability for those in the ₹5 lakh income bracket will also align with our expansion in Tier-II and Tier-III markets, and augurs well for the industry as a whole."
Shares of gold-related companies tumbled soon after the announcement. Titan Company dropped as much as 3.1 percent, Goldiam International 6.7 percent, Lypsa Gems 3 percent, PC Jeweller 4.84 percent, Renaissance Jewellery 2 percent, Thangamayil Jewellery 5.8 percent and Tribhovandas Bhimji Zaveri 6.4 percent.
At the same time, domestic gold futures rallied more than 2 percent after the announcement.
In 2012, January gold import duty was raised by 2 percent. However, in 2013 the United Progressive Alliance government raised the rates thrice, after which the duty was set at 10 percent.
"Spot gold in the international market held steady near $1,415 an ounce as investors stay away from taking fresh bets ahead of the key US employment data scheduled later in the day. There are expectations that the job data would offer more cues on US Fed’s stance on interest rate cut. Anyhow, prices are on track for a seventh consecutive weekly gain with prices gained more than two percent during this week," Hareesh V, Head - Commodity Research at Geojit Financial Services, said.
Somasundaram PR, Managing Director, India, World Gold Council said that this hike may impact the business of gold market in the country.“Import duty hike on gold from 10% to 12.5% will negatively impact India’s gold industry. This will impede efforts to make gold as an asset class particularly when gold prices are already rising globally. In addition, the grey market will thrive which will dilute efforts to reduce cash transactions,” he said.