Impact of Customs Duty Reductions on Precious Metals

What is the Decision?

The Union Finance Minister Nirmala Sitharaman has announced notable reductions in customs duties on precious metals:

• Gold Bars: Reduced from 15% to 6%
• Gold Dore: Reduced from 14.355% to 5.35%
• Platinum: Reduced from 15.4% to 6.4%
• Silver Bars: Reduced from 14.35% to 6%
• Silver Dore: Reduced from 14.35% to 5.35%

Why This Decision?

The key objectives behind reducing customs duties on these precious metals include:

• Reduce Smuggling: High customs duties have correlated with increased smuggling of gold and silver. Lowering these duties aims to combat illegal trade.
• Enhance Domestic Value Addition: Making raw materials more affordable promotes the local jewellery manufacturing industry.
• Support the Diamond Cutting and Polishing Industry: Implementing safe-harbour rates for foreign mining companies selling raw diamonds in India will fortify the diamond sector, which employs many skilled workers.
• Boost Economic Growth: Stimulating the gem and jewellery sector enhances its competitiveness on a global scale.

Pros

• Reduction in Smuggling: Decreased customs duties are expected to lessen the incentive for smuggling, ensuring that more transactions are recorded and taxed appropriately.
• Boost to Domestic Industry: More affordable raw materials will aid domestic jewellers, enhancing their global competitiveness.
• Economic Growth: Lower duties can stimulate the economy by increasing legal imports and supporting related industries.
• Support for Skilled Workforce: The diamond cutting and polishing industry, which employs a significant number of skilled workers, will experience improved conditions and potentially increased business.

Cons

• Revenue Loss: The government may incur an annual revenue loss of about ₹28,000 crore based on FY24 import levels.
• Market Volatility: Abrupt changes in customs duties can lead to market instability and uncertainty.
• Short-Term Disruption: Existing contracts and supply chains might face short-term disruptions as they adapt to the new duty structure.
• Dependency on Imports: Lowering duties could heighten dependency on imported raw materials, potentially impacting the balance of trade.

Industry Response

The proposals have received a positive reception. The Gem & Jewellery Export Promotion Council (GJEPC) regards them as transformative for the indigenous gem and jewellery industry. The removal of the equalisation levy, along with the introduction of safe-harbour tax on rough diamond trading, is expected to position India as the leading centre for rough diamond trading.

Conclusion

The reduction in customs duties on gold, silver, and platinum represents a strategic initiative aimed at curbing smuggling, enhancing domestic value addition, and supporting the diamond industry. Despite potential drawbacks, the overall impact is anticipated to be beneficial for the economy and the jewellery sector.

Frequently Asked Questions (FAQs)

Q1. What are the new customs duty rates for gold and silver?
Answer: Customs duties on gold bars have been reduced from 15% to 6%, while silver bars are now at 6%, down from 14.35%.

Q2. How will this decision impact smuggling?
Answer: Lower customs duties aim to reduce the incentive for smuggling, thereby increasing the number of legal transactions and tax revenues.

Q3. What benefits does the diamond industry expect from this decision?
Answer: The diamond industry anticipates improved market conditions and increased business opportunities with the introduction of safe-harbour rates for rough diamond trading.

Q4. Is there any downside to reducing customs duties?
Answer: Yes, potential downsides include an estimated revenue loss of ₹28,000 crore and possible market volatility.

Q5. Will domestic jewellery manufacturers benefit from the new duty structure?
Answer: Yes, the reduced duties on raw materials are expected to enhance the competitiveness of domestic jewellery manufacturers.

UPSC Practice MCQs

Question 1: What is the new customs duty rate for gold bars?
A) 15%
B) 10%
C) 6%
D) 5%
Correct Answer: C

Question 2: Which industry is expected to benefit from the abolition of the equalisation levy?
A) Textile Industry
B) Automobile Industry
C) Diamond Industry
D) IT Industry
Correct Answer: C

Question 3: What is one of the objectives of reducing customs duties on precious metals?
A) Increase smuggling
B) Enhance domestic value addition
C) Support foreign industries
D) Decrease legal imports
Correct Answer: B

Question 4: How much annual revenue loss may the government face due to these reductions?
A) ₹10,000 crore
B) ₹28,000 crore
C) ₹50,000 crore
D) ₹5,000 crore
Correct Answer: B