Discount for sovereign gold bond hints at duty cut

Govt considering bringing down the 10% import duty on gold to 6%

The government is considering bringing down the 10 per cent import duty on gold to 6 per cent, a rate considered adequate to discourage smuggling.

 
All trade and industry bodies have flagged the fact that the high duty was leading to gold smuggling.
 
The first concrete indication of a duty cut is seen in the discount of Rs 50 per gm offered by the government in the sixth sovereign gold bond issue that is opening on Monday.
 
The formula-based issue price for the bond works out to Rs 3,007 per gm on the basis of the previous week’s gold price declared by the Indian Bullion and Jewellers’ Association. On Friday, the Reserve Bank of India announced that the bonds would be priced at Rs 29,57 per gm.
 
“The discount of Rs 50 per gm works out to a little less than
 
2 per cent at current prices, but this indicates the government may lower the import duty by 2 percentage points,” said Surendra Mehta, secretary of the Indian Bullion and Jewellers’ Association. If the duty is cut, market prices will come down by 2 percentage points but bond investors are being compensated in advance. The notification issued by the government on the bond issue hasn’t said that repayment will also be at a discount.
 
The Union finance ministry has called a meeting in the third week of November to discuss customs duties in view of the goods and services tax. The meeting will settle the balance between the GST rate and customs duty rates, and a 2 percentage point cut in the customs duty on gold is expected at that point. Other goods might also see adjustments in customs duties, sources said.
 
The government has also for the first time in the past year lowered the interest rate on sovereign gold bonds from 2.75 per cent to 2.5 per cent.”The discount could attract customers to the bonds despite the cut in interest rates,” a banker said.  
 
A market participant, however, said the reduction in the interest rate was being discussed for a few months because the bonds were a part of the government’s borrowing programme and rates for other instruments, including small savings schemes, were declining. Most market participants expect the government to lower the gold import duty to 6 per cent. If duty is cut by 2 percentage points after Diwali, another 2 percentage points could be shaved off in the budget.
 
A sharp fall in the country’s gold import bill in the first half of 2016-17 is also seen as a trigger for the import duty cut.