Gold Price: The demand for physical gold and jewellery rises amidst the festival season, either Akshaya Tritiya or Ganesh Chaturthi or the upcoming Diwali season. In 2024, Indian citizens are in for a treat with prices of gold to become cheaper, making it more accessible in India. The reason? It is the latest customs duty cut which will play a key role in driving strong growth in yellow metal, despite temporary challenges.
Gold Custom Duty Cut:
As much as a 9% cut is imposed in customs duty on gold to 6% from 15%, while the duty is trimmed to 5.35% on gold dore from earlier 14.35%. As per the World Gold Council, this is the sharpest reduction on record and the lowest since June 2013. Before the Budget announcement, gold import duties had been above 10% for almost 11 years. Data from the council hinted that while cutting customs duty by 9% and keeping the international gold price, exchange rate and tariff values constant, this should translate up to a 7.7% cost reduction in yellow metal.
For example: 10 grams of gold of Rs 65,000 + 15% customs duty = gold value at Rs 74,750. Here, the value of basic duty will be at Rs 9,750. This will be lower at 6% customs duty.
Example: 10 grams of gold of Rs 65,000 + 6% customs duty = gold value of Rs 68,900. The basic duty comes around Rs 3,900.
The example is excluding GST rates, making charges, and capital gains tax rates on the final price of physical gold.
As per WGC, the reduction in customs duty has the potential to measurably increase demand both during the upcoming buying season (between August and December) and over the longer term. In the past, when the import duty was raised in 2012, it created headwinds for jewellery demand but its effect was even more noticeable in the bar and coin market.
Further, the WGC's latest report in August highlighted that despite a rise in international gold prices, domestic gold prices have fallen due to a significant 9% reduction in import duty announced in the Union Budget. The duty cut has reduced the landed cost of gold, leading to a 6% decrease in the domestic landed price since the cut was implemented. However, even with this recent decline, domestic gold prices have risen by 10% on a y-t-d basis. This can be attributed to the global price strength (y-t-d gains of 18%) amid strong central bank purchases, elevated geopolitical risks and intensifying expectations of a monetary policy pivot from the US Federal Reserve.
WGC's analysis indicated that in the past, when the import duty was raised in 2012, it created headwinds for jewellery demand but its effect was even more noticeable in the bar and coin market. After the customs duty cut, WGC's analysis indicates that Indian consumer demand - the sum of jewellery and bar and coin demand - could see an additional 50t or more in the second half of 2024. This is through a combination of an initial boost in consumer appetite given the more attractive price as well as a longer-term effect as local prices align more closely with the international price.
What To Expect Ahead Of Diwali Season?
Prithviraj Kothari, Managing Director of RiddiSiddhi Bullions Limited (RSBL) said, "The price reduction is anticipated to drive a 5-10% increase in sales volumes as consumers capitalize on the lower prices, especially during key festive and wedding seasons, which are traditionally periods of peak gold purchases in India. These seasons, including Diwali and Akshaya Tritiya, are expected to see a surge in demand as gold becomes more accessible to a broader range of consumers."
However, Kothari also believes there are short-term challenges for the yellow metal.
He said, "While the short-term outlook is positive, the market may face some challenges. Retailers might experience inventory losses due to the reduced prices, although these losses are expected to be partially offset by lower marketing and promotional expenses, thanks to the naturally increased demand."
Overall, he lastly said, "The duty reduction has positioned the gold market in India for strong growth, with increased affordability driving demand and potentially leading to sustained consumer interest in gold as both an investment and a cultural asset."
Tax Rules On Physical Gold:
In the Union Budget 2024, FM Nirmala Sitharaman revised the holding period and tax rates for long-term capital gains. The holding period for taxation of long-term capital gains on gold has been reduced from 36 months to 24 months. The rate of long-term capital gain has also been reduced from 20% with indexation to 12.5% without indexation. This proposal is applicable with effect from 23 July 2024.
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