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Reversal of Tax Rule Could Boost Gold Demand in India

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The Indian government has reversed a tax rule that was putting a damper on gold demand in the country.

The government included Indian jewelers under the Prevention of Money-Laundering Act last August. 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). According to the Economic Times, the requirements were hindering high-value deals.
The reversal of the rules comes just before a peak season for gold demand in India. Many Indians buy gold leading up to the Hindu festival of Diwali, which falls on Oct. 19 this year.  Shares of jewelers increased by as much as 8% with the announcement.

The government rescinded the rules on jewelry purchases along with a number of other tax provisions, according to the ET.

India also slashed tax rates on 27 items, and extended the period for small businesses to file returns, in a bid to reverse the blow to growth stemming from a chaotic roll out of the nationwide sales tax.”

Analysts say the rollback of the purchase rules will be good for gold demand in India, the world’s second-largest consumer of the yellow metal. All India Gems & Jewellery Trade Federation chair Nitin Khandelwal told the Economic Times that with the compliance rules now scrapped, sales may pick up, providing relief for jewelers.

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.”

Industry analysts estimate gold imports into India fell 43% in September after the government implementation of the “know your customer” rules. The director of Senco Gold & Diamonds told the ET sales had fallen 30-50% over the past two months or so.

Now we can think of a recovery and back to close to last year’s sales. Big-ticket booking will start once the wedding jewelry buying starts, which is yet to happen.”

Indians have a love affair with gold. It’s not just a luxury. Even poor people buy gold in India. The yellow metal is interwoven into the country’s marriage ceremonies and cultural and religious 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 poorer rural areas, where the vast majority of people live outside the official tax system. According to the World Gold Council, Indian households hold over 22,500 tons of gold.

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