GST could dampen India gold demand in short term - WGC

By Rajendra Jadhav

MUMBAI (Reuters) - A hike in taxes on gold sales in India could pressure short-term demand from the world's No.2 consumer of the metal, the World Gold Council (WGC) said in a report.

Faltering appetite in a country where gold is used in everything from investment to wedding gifts could drag further on global prices, already trading near their lowest level in 7-weeks.

"In the short-term at least, we believe (the tax) may pose challenges for the industry. Small-scale artisans and retailers with varying degrees of tax compliance may struggle to adapt," the WGC said in a report published on Thursday.

As part of a new nationwide sales tax regime that kicked in on July 1, the Goods and Services Tax (GST) on gold has jumped to 3 percent from 1.2 percent previously.

There have been fears the tax increase could stoke under-the-counter buying and drive up appetite for precious metal smuggled into India, where millions of people store chunks of their wealth in bullion and jewellery.

Meanwhile, the WGC also said a government move to ban cash transactions over 200,000 rupees ($3,090) from April 1 could hurt gold demand in rural areas where farmers often purchase the metal using cash due to limited access to cheques and electronic payment systems.

Two-thirds of India's gold demand comes from rural areas, where jewellery is a traditional store of wealth.

"(The transactions rule's) potential impact isn't entirely clear: it could curb gold purchases; it could encourage gold shoppers to buy smaller amounts of gold spread over more transactions; or it could push a large part of demand underground and encourage a black market in gold," said the WGC.

The group kept its demand estimate for India at 650 to 750 tonnes for 2017, well below average annual demand of 846 tonnes in the past five years.

In the long-term, the GST will have a positive effect on the gold industry by making the sector more transparent and improving the supply chain, the WGC added.

($1 = 64.7675 Indian rupees)

(Reporting by Rajendra Jadhav; Editing by Joseph Radford)