Higher gold taxes could backfire again |
When governments want consumers to buy less of something, they usually reach for taxes. India’s latest hike in gold import duties follows that familiar pattern. The assumption is straight for ward: make gold more expensive, demand will fall, imports will decline, and pressure on the rupee will ease. The problem is that gold demand in India has never been driven solely by price. It is tied to savings habits, cultural preferences, inflation concerns, and economic uncertainty.
Policies that ignore those realities rarely eliminate demand. More often, they distort the market around it. The government’s decision to raise import duties on gold and silver to 15 per cent is already pushing domestic prices sharply higher. Industry estimates suggest the revised tax structure could increase gold prices by nearly Rs 27,000 per 10 grams after duties and taxes. Policymakers hope that costlier imports will discourage excessive bullion buying and ease pressure on foreign exchange reserves amid currency volatility and geopolitical uncertainty.
But when price increases are driven primarily through taxation, markets often adjust in ways policymakers do not anticipate. India has tried this approach before, and the results were mixed at best. When import duties on gold were sharply raised in the past, official imports slowed, while smuggling surged. The widening gap between domestic and global prices created a strong incentive for illegal trade. That informal network weakened only after duties were reduced. The........