India, the world's biggest gold buyer, may increase import taxes for a second time this year as it seeks to narrow a widening current-account deficit, curbing demand for bullion in jewellery and investment.
"There's a feeling that the government is looking at increasing the duty again, maybe to 8 per cent," said Bachhraj Bamalwa, the chairman of the All India Gem and Jewellery Trade Federation. "The industry fears they may reimpose the excise tax, which was scrapped last year." The levy is currently 6 per cent.
India will present its annual budget on Thursday. The finance minister P Chidambaram is seeking to curb the spending deficit, partly by increasing taxes.
Gold rallied for a 12th year in 2012 as investors and central banks boosted purchases, forcing India to triple the import duty.
"We're keeping our fingers crossed as any change will be bad for the industry," said Mr Bamalwa. "We'll be happy if the status quo is maintained." A further increase in the levy might cut imports as much as 20 per cent this year from 860 tonnes last year, he said.
DS Malik, a spokesman at the finance ministry in New Delhi, declined to comment on the tax changes yesterday.
Gold demand for jewellery and investment in India fell to 864.2 tonnes in 2012, the second straight year of decline, after consumption was curbed by a jewellers' strike to protest against a 1 per cent excise duty on non-branded ornaments.
While the excise duty was later scrapped, the shutdown cost the industry about 200 billion rupees (Dh13.46bn) in revenue, according to the jewellers' federation.
Immediate delivery bullion fell as much as 0.6 per cent to US$1,555.55 an ounce, the lowest price since July 12, and was at $1,568.65 in afternoon trading in Mumbai.
The precious metal has fallen 6.4 per cent this year. Gold for April delivery dropped as much as 1.1 per cent to 29,263 rupees per 10 grammes on the Multi Commodity Exchange of India, the lowest price since July.
About 80 per cent of the current-account deficit, the widest among the biggest emerging economies, is due to gold imports, according to the Reserve Bank of India.
The central bank's governor, Duvvuri Subbarao, who cut the benchmark interest rate by 25 basis points last month to 7.75 per cent in the first reduction since April, has cited budget and current account deficits among those constraining further cuts in borrowing costs.
India should recycle gold scrap, impose export obligations on bulk purchasers and take "fiscal measures" to curb imports and domestic demand, a panel set up by the central bank to study issues related to imports and companies lending against the metal said in a report this month.
"By increasing the duty you are going to encourage smuggling," said Monal Thakkar, the president of Amrapali Group, an importer. "India will either remain number one or number two importer".
Buying gold is considered auspicious in India during religious festivals and weddings.
Imports surged 62 per cent to 255 tonnes in the fourth quarter of last year on expectations of higher import duties and on demand for marriages and festivals, said the World Gold Council. Purchases jumped 33 per cent to 80 tonnes in January as traders rushed to beat the tax increase, Mr Bamalwa said.
* Bloomberg News