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Sunday, August 18, 2013

In yet another move to curb current account deficit (CAD) the government has raised taxes on gold imports. This is the third time that import taxes have been raised in the year. But the efficacy of this move is questioned. There is a fear that increasing taxes will not curb gold imports but rather open the doors for smuggling. And rightly so. Taxes are being raised to curtail demand. But in India the demand for gold still continues to rise. And with the festive season approaching soon, the demand may get a further fillip. This would mean that traders would find unethical ways to meet this demand. This can result in smuggling of the yellow metal. Further, it may be noted that majority of the gold demand in India is met via imports. Hence, cutting that source out via increasing taxes means that supplies in the channel may dry. But with demand remaining intact gold premiums would rise. This entices imports via unethical means like smuggling. While the taxation move is to curb CAD perhaps government should find other ways to increase capital flows in order to fund the deficit. Else gold smuggling would prosper and may lead us back to the days of Gold Control Act!     

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