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India Announces Lower Than Expected Gold Tax Rate

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The Indian government set the tax rate for gold under the uniform goods and services tax lower than expected, sending a wave of optimism through the country’s gold and jewelry dealers. Analysts say the lower rate signals a potential recovery in demand for the yellow metal in the world’s second-largest market.

According to a Bloomberg report, India fixed the duty at 3% over the weekend, lower than the 5% expected.

The goods and services tax, to be implemented from July 1, will replace more than a dozen domestic levies including excise tax and state tariffs, drawing India for the first time into a common market.”

The gold market has already showed signs of revival in India this spring. Festival-goers rushed to buy gold in celebration of Akshay Tritiya in April. Gold sales increased more than 30% during the important Hindu holiday. All-told, Indians bought more than 23 tons of gold in a single day. Overall, demand increased in the Asian nation during the first quarter. Gold imports into India surged 582% year-on-year in March to 120.8 tons. It was the largest import number since the middle of 2015.

But even with the strong spring, many analysts expected demand to slump with imposition of the new tax. The lower than expected rate was a welcome surprise for gold and jewelry dealers. Shares of jewelers climbed after the announcement, according to Bloomberg.

Titan Co. advanced as much as 15% to a record 542.50 rupees ($8.4) in Mumbai, while Tribhovandas Bhimji Zaveri Ltd. increased as much as 7%, Gitanjali Gems Ltd. was up 8.6% and PC Jeweller Ltd. gained 9.8%.”

The government hopes the new tax structure will force smaller, unregulated gold dealers to become tax compliant. That may be easier said than done.

Gold is a central part of the Indian economy. Indians traditionally buy and hold gold. The yellow metal is interwoven into the country’s marriage ceremonies and cultural rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system. As we reported last month, many Indians have thwarted a government policy to bring the underground economy out of the shadows by converting their “black money” into gold.

Regardless of whether the new tax policy achieves government aims, the lower than expected rate was good news, and almost certainly means demand for gold in India will be stronger than most analysts expected through the end of this year.

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