How India’s comprehensive fiscal reform may boost gold demand

News Arnulf Hinkel – 14.07.2017

On 1 July 2017, the most comprehensive fiscal reform in India – not only since the liberalisation of the national economy in the early 1990s, but since the country’s independence in 1947 – came into effect. The new Goods & Services Tax (GST) has replaced twelve indirect taxes and is due – similar to VAT in western countries – for all invoiced economic services such as deliveries of goods and services. Indirect taxes on gold products amounted to 12.2 percent before the reform, while gold buyers will now have to pay about 13.5–14 percent, with the GST on gold products alone at 3 percent. The remainder is a result of the indirect taxes along the supply chain of gold coins, bars or jewelry.

Expected impact on gold demand

Now the question may arise as to how an indirect tax hike should strengthen gold demand. After all, increases in tax rates are more likely to have a negative effect on demand. To understand this, it is important to know that gold is an integral part of culture in India, the world's largest democracy with 1.3 billion inhabitants. Gold also plays a central role in household wealth. While the newly introduced GST will make gold products a little more expensive for Indian buyers, the tax will lend additional momentum to the Indian economy, which is already doing well: the reform of one of the world’s most complex tax laws will make supply chains more transparent than ever, and hence more efficient. Alistair Hewitt, Director of Market Intelligence at the World Gold Council, anticipates significantly higher demand from Indian gold buyers as a result of the economic boost caused by the GST. While demand for gold in 2016 was at 666 tons in India, Hewitt expects an increase to 850 to 950 tons by 2020.

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