(Image source from: Economictimes.indiatimes.com)

India has increased the import taxes on gold and silver from 6% to 15%, according to government announcements made on Wednesday. This move is part of a strategy to reduce the amount of these metals bought from abroad and to alleviate the strain on the country's foreign currency reserves. The rise in taxes might lower the demand in the world's second-largest market for precious metals, but it could also help decrease India's trade deficit and support the rupee, which is one of the weakest currencies in Asia. Nevertheless, industry representatives cautioned that these new import taxes could lead to an increase in smuggling, a practice that had lessened when India lowered tariffs in mid-2024. The government has established a 10% basic customs duty along with a 5% Agriculture Infrastructure and Development Cess (AIDC) on imports of gold and silver, raising the total tax from 6% to 15%. “As anticipated, the government has increased duties to manage the current account deficit. However, this may impact demand, given that gold and silver prices are already high,” stated Surendra Mehta, national secretary of the India Bullion and Jewellers Association.

On Sunday, Prime Minister Narendra Modi encouraged the public to refrain from buying gold for a year in order to safeguard foreign currency reserves. India relies on imports to satisfy almost all of its gold needs. Demand for gold, especially for investment reasons, has surged in India due to a recent rise in prices and poor returns from stock markets in the past year. Investments into India's gold exchange-traded funds (ETFs) soared by 186% compared to the previous year in the March quarter, reaching an unprecedented 20 metric tons, as reported by the World Gold Council last month. In recent weeks, India has been working to limit gold imports and started enforcing a 3% integrated goods and services tax (IGST) on gold and silver imported, which caused banks to stop imports for over a month. Consequently, imports in April fell to a level not seen in nearly 30 years. Although banks have restarted imports after settling the 3% IGST, traders believe that import levels may drop again following the tax hike. “The grey market is likely to become more active, as the reasons to smuggle in gold are strong. At the current price point, smugglers could earn substantial profits,” remarked a bullion dealer from a private bank in Mumbai, who requested anonymity since he wasn't allowed to speak to the press.