New Gold Tax Turns Indian Importers To Korea

The gold community has been keeping a watchful eye on how India’s gold consumption has reacted to the tax changes implemented this year. This is largely due to the fact that purchasing demand in the face of a more arduous tax environment can provide a good indicator of whether an asset is being purchased for its inherent value or for alternative reasons such as convenience or particulars surrounding the mechanics of moving and storing wealth in a tax efficient manner. 

The astute eye is looking for either signs of abatement in gold demand from the world’s second largest consumer in the face of tax increases or rather a continuation of demand with an increase of tax minimisation techniques.

To date we have seen gold purchasing very strong in India with buyers employing a number of techniques to minimise the impact of the increased tax. These techniques include bringing purchases forward as we covered here and travelling to locations such as Dubai, Singapore and Sri Lanka which we wrote about here to make purchases in a more tax friendly environment. 

It is becoming more evident that the GST imposed in India on the 1^st of July this year which increased the previous 1.2% tax to 3% is seeing gold purchasers buy smarter rather than buy less. According to data from GFMS, to the end of last month, 2017 import figures in India are double what they were only one year ago at 550 tonnes.

Additionally, it is now being reported that 25 tonnes of gold is expected to be imported into India from South Korea over the months of July and August in legal exploitation of the fact that a 10% customs duty payable on gold is inapplicable due to the fact that a FTA (Free Trade Agreement) is in place between the two nations. 

Notably, South Korea is being favoured over other FTA options due to the availability of gold in certain forms that avoid the 10% customs duty. These forms include coins.

The current South Korean import tally sits at 12 tonnes since the GST was introduced at the start of last month. The GST introduction was part of a tax simplification which abolished a previous 12.5% excise duty on such imports; a change that created the loophole now being exploited. 

The discounted imports are impacting upon local vendors and refiners within India. MMTC-PAMP’s managing director in India, Rajesh Khosla told Reuters that those who currently import from South Korea “can give a $10 or $15 discount. Refiners are operating with a 0.65 percent margin. We cannot compete with someone who is giving a 1 percent discount”.

Only six weeks into India’s tax restructure and already new schemes are being adopted to minimise its financial impact on the profitability of gold. The windfalls in this case however may be short lived with a government spokesperson indicating that the Indian government has become aware of the loophole and is collecting data in order to determine how to resolve the issue.