India’s government believes that exporters in China and Malaysia are funneling gold jewelry through Thailand to take advantage of the free trade agreement between that nation and India. Gold jewelry from Thailand has an import tax of only 1%, compared to 10% on imports from other nations, but there had to be at least 20% value added in Thailand to the jewelry to qualify.
New Delhi believes that companies are simply transshipping through Bangkok to avoid import fees, and has notified the Thai government that they plan to raise the duty on Thai jewelry imports to parity with other nations in the free trade agreement currently being negotiated between the two nations.
In addition to plugging this import loophole, the Indian government is planning to raise the import tariff on refined gold for the third time in a year, to 8%. The import taxes on gold bars was 2% in early 2012, when the taxes were doubled to 4%. The government raised the fees to 6% just last month in an attempt to curb gold imports. A reinstatement of a 1% excise tax on top of the import duties is also being considered.
India imported 864 tons of gold in 2012, which was down from 2011 due to higher import taxes and a weaker rupee, which made gold more expensive. Gold is the second largest import for India (oil is #1,) making it a major contributor to India’s current accounts deficit. India’s CAD stands at 4.2% of GDP. The target range is 2.5% to 3%. The additional taxes will not only (hopefully) curb gold imports further, it will provide additional revenue for the government, which is battling a budget deficit and cannot afford to deliberately weaken the rupee due to current inflation levels.