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How Will India’s GST Impact Gold Demand?

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GST and India’s gold demand

On July 1, 2017, a lot of taxes in India were replaced by a single, simpler goods and services tax (or GST). Tax on gold under the GST has been set at 3.0% instead of the 1.0% excise duty and 1.2% value added tax. The customs duty of 10.0% remains the same as before. The new tax is significantly lower than many had expected and implies a modest tax increase. People in India advanced their gold purchases into May and June to avoid paying higher taxes in July. That caused gold imports in India to increase by four times year-over-year in May to 103 tons.

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WGC’s take on GST and gold demand

The World Gold Council (or WGC) issued a report in June highlighting the potential impact of the GST on India’s gold demand. It believes that while GST might have a negative impact in the short term as the industry goes through a period of adjustment, the net impact in the long term is likely to be positive. It believes that GST should eliminate double taxation and improve the efficiency in supply chains. WGC expects India’s demand for gold to be 650–750 tons in 2017 and rise to 850–950 tons by 2020.

India’s gold demand

Jewelers in India are expecting gold demand to normalize toward the end of the year as weddings and festive seasons take hold. Many argue that since gold’s demand was not impacted much when the government of India imposed a customs duty a few years ago, the overall demand should not weaken this time, either.

Gold purchases by the world’s second-largest consumer usually support gold prices (GLD) and gold stocks such as B2Gold (BTG), Goldcorp (GG), Newmont Mining (NEM), and Coeur Mining (CDE). It also affects ETFs such as the VanEck Vectors Gold Miners ETF (GDX), which invests in these stocks. They make up 18.5% of GDX’s holdings.

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