India just stunned the gold market

Reuters/Babu

I wrote a few weeks ago about record slowdowns in gold sales across India. With buyers in the world’s number-one consuming nation holding off on purchases ahead of an expected cut in import taxes from the federal government.

And yesterday we got the decision from India’s officials on the gold tax. Although it wasn’t at all what the market had hoped for.

Finance Minister Arun Jaitley presented the government’s gold plan as part of the annual federal budget. Saying that gold import taxes will remain unchanged this year – dashing hopes for a cut.

In fact, Jaitley actually announced an increase in taxes on gold sales. Saying that the government will add a sales tax of 1 percent to all gold jewelry sold in India.

Such a sales tax had been scrapped by the government four years ago. But is now being revived by officials with the stated aim of reducing gold consumption.

And that wasn’t the end of increased taxation on bullion. With Minister Jaitley also saying he will raise taxes on imports of dore gold bars – to 8.75 percent, from a former 8 percent.

Dore purchases had recently become a preferred way for India’s gold buyers to get a break on the 10 percent import tax for refined gold. But the new tax significantly narrows the arbitrage here.

All of which suggests that the government is very serious about reducing gold demand – in order to keep down the country’s current account deficit.

The increased taxes could also be aimed at driving buying away from physical gold. And toward paper instruments such as the gold-backed bonds recently introduced by the government.

Whatever the case, these measures are very likely to have a dampening effect on gold purchases in this key market. Watch for statistics on gold purchases to see how great the damage will be.

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