India's recent decision to more than double its gold import tariffs to 15% in May is expected to lead to a significant increase in gold smuggling, with industry experts projecting illicit inflows could surpass 100 tonnes this year. This move, intended to curb demand, reduce the trade deficit, and ease pressure on the rupee, has inadvertently created a lucrative opportunity for smugglers.
The higher duty has made legal gold imports considerably more expensive, with the landed cost of one kilogram of gold reaching approximately 1.65 crore rupees ($197,377 USD) after factoring in the 15% import duty and 3% Goods and Services Tax. Smugglers, who bypass these taxes, can offer discounts of over $200 per ounce, or more than 4%, allowing for substantial profit margins. This has led to a "grey market" where gold can be purchased at a discount of up to 10 lakh rupees ($11,962 USD) per kilogram compared to legal market prices.
This situation is reminiscent of past duty hikes. For instance, when India raised duties from 2% to 10% between 2012-2013, seizure cases jumped significantly, and unofficial inflows were estimated to be between 50 and 200 tonnes annually. The India Bullion and Jewellers Association (IBJA) warns that smuggling could rival the high levels seen in FY14. The World Gold Council also noted that following a 4% duty hike in 2013, unofficial imports rose seven-fold within a year, climbing from 10 tonnes to 70 tonnes in the first quarter of 2014.
The resurgence of the grey market means substantial revenue losses for the Indian government. Based on projections of 100 tonnes of smuggled gold, approximately $2.65 billion in tariffs and sales tax could be lost. Legal importers, banks, and refiners are struggling to compete, with domestic discounts on legal gold exceeding $100 an ounce, making refining uneconomical. Gold dore, a semi-pure alloy, also faces challenges despite a slightly lower import duty.
While destinations like the Middle East (particularly Dubai), Bangladesh, and Nepal are identified as sources, illegal gold often enters India via travelers, especially at airports in Maharashtra, Tamil Nadu, Gujarat, and West Bengal. Customs officials recently seized smuggled gold worth over 4.19 crore rupees ($501,475 USD) from two passengers arriving from Dubai at Mumbai's Chhatrapati Shivaji Maharaj International Airport.
