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Indian Gold Demand Up in September Even With Tax Rule

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After nearly tripling in August, demand for gold in India remained strong last month, despite a tax rule that put a damper on high-dollar jewelry purchases.

Gold demand rose 31% year-on-year in September. Imports came in at 48 tons, according to a Reuters report.

Higher purchases by India, the world’s second-biggest consumer, could lend support to global prices that are trading near their highest level in a week. The higher imports may also widen the South Asian country’s trade deficit.”

Continued strong demand in India was something of a surprise. It was fighting headwinds caused by a tax rule that went into effect back in August. The government included Indian jewelers under the Prevention of Money-Laundering Act. The rules increased compliance requirements for high-dollar jewelry purchases. Buyers had to provide their income tax identity for transactions above 50,000 rupees ($766). Analysts said the requirements were hindering high-value deals.

Last Friday, the Indian government announced it was rescinding the rule.

The Indian holiday of Dussehra fell on Sept. 30 this year. Last year, Indians celebrated the festival in October. The earlier date helped push gold demand forward into September. But even with the holiday falling earlier this year, the impact of the tax reporting rule was apparent. Although higher than last year, September demand was off the 2017 monthly average of 75 tons.

With the government lifting the tax rule, and another important holiday coming up, demand could pick up even more in October. All India Gems & Jewellery Trade Federation chair Nitin Khandelwal told the Economic Times that with the compliance rules now scrapped, he expects jewelry sales to pick up.

We will see the mid-sized, high-value purchases coming in now and sales will be better-than-expected during Diwali and the wedding season after that.”

August’s strong demand came despite a tax increase that went into effect this summer. On July 1, the Indian government replaced a labyrinth of taxes with a nationwide 3% Goods & Services Tax (GST).  The World Gold Council called it the “biggest fiscal reform since India’s liberalization in the early 1990s.” The WGC said the new tax structure would ultimately increase demand for gold in India, but analysts braced for a short-term dip in imports as the tax went into effect and the market adjusted to the new system.

Gold demand in India has rebounded this year after a tough 2016. A number of factors pushed demand down last year, including a jeweler strike. But by June of this year, the country’s gold imports had already topped 2016 numbers.

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