Dubai: Jewellery retailers are hoping gold prices in the UAE will retain the 15 per cent lower cost advantage over Indian retail rates after tomorrow’s presentation of the 2023-24 federal budget by the Finance Minister Nirmala Sitharaman.
India currently imposes 15 per cent import duty in bullion, which was raised in 2019 from 12.5 per cent as the Indian government bid to control domestic demand for gold and jewellery and thus save on precious dollar reserves. But apart from a drop in demand during 2020 brought on by the lockdowns during Covid, Indian’s appetite for gold has run consistently high. That’s been a major boost for gold retailers in the UAE, with gold prices around 15 per cent lower than what resident Indians get from jewellery showroom in India.
“This means just about every Indian visitor to the UAE is making a trip to a gold store here – and they’ve been buying even when UAE gold rate went past Dh200 a gram for 22K,” said a jeweler.
Now, there is speculation that FM Nirmala could bring down the import duty on gold when she presents the government financial plans and economic targets on Wednesday. A key reason, according to sources, is that India wants to cut down drastically on smuggled gold being brought into the country.
“What I understand is that the Indian Ministry of Commerce has sought a reduction with the objective to push India’s jewellery exports as well as the manufacturing in the gems and jewellery sector,” said Anil Dhanak, Managing Director of Dubai-based Kanz Jewels.
“Being the second largest consumer of gold in the world (after China), any reduction will certainly play a major role in the growth of the jewellery industry. The retail price of gold will come down, and with the wedding season coming up will provide a big boost to the trade.
“Cutting down on import duty would also put a dent in the smuggling of gold.”
A major revenue source
Question is whether the Indian government will want to cut down on the receipts it generates from the 15 per cent import duty. Here too, UAE-based gold exporters are at advantage.
Each year, India imports around 800 tonnes of gold. After the CEPA (Comprehensive Economic Partnership Agreement) deal between India and UAE from May last year, UAE’s exports of gold to the country shot up instantly to the 120 tonnes maximum allowed in a year. On these exports, India charges 1 per cent lower import duty.
“As I understand it, India has a tariff-rate quota of 200 tonnes,” said Dhanak. “This means the UAE has a 1 per cent advantage in gold bars since tariff in perpetuity will be 1 per cent less than that s charged for gold bars India imports from other parts of the world.” (A tariff rate quota means lower duty on imports of a given product within a specified quantity. Anything over and above that will be charged higher.)
India's gold jewellery industry is looking forward to changes in the import duty of gold, which stands at 15% (inclusive of cess). The current scenario is such that the gold prices are at an all-time high domestically, thus the pricing gap between the organized and the unorganized sectors have grown, and is a matter of the hour to be looked at.
The price disparity between India's domestic gold price and the international price is quite high due to steep dollar exchange rates. Overall, the effect of the price gap combined with the discounts in the domestic market has eroded business to levels that cannot be described.'
- Shamlal Ahamed, Managing Director - International Operations at Malabar Gold & Diamonds
What India loses from ‘parallel’ gold imports
Industry sources in India say that since the 15 per cent import duty, gold arriving in the country through the grey market has soared. Every day there are media reports of seizures made from passengers arriving at airports across India.
“The reason why they take such risks is because of the profit margins,” said Adv. S. Abdul Nazar of the All India Gem & Jewellery Domestic Council. “There is the 15 per cent difference in gold prices between showroom rates in the Gulf and in India. In addition, there is also the 3 per cent GST (Goods & Service Tax) being charged in India. Gold brought into the country through parallel channels end up making profits of Rs200,000 and over - that's just on the GST component. Profits can hit up to Rs700,000 on 1 kilo of gold.
This is what the Indian government will try and stop – or reduce from current elevated levels – if they decide to lower import duty to 12.5/10 per cent like it was in the past.
In the next 24 hours, with the Indian Budget announcement, gold shoppers and UAE's jewellery trade will have their answer.