Talk among the Indian physical gold community this week centered around the pending Goods and Service Tax that will be assigned by the government across all goods, with a range of 1-5% suggested for bullion, sources said.
One high-level wholesale source said it could be as low as 1% for bullion, although other sources, including bankers and refiners, suggested that as being too low.
In a detailed note to clients, industry research group Metals Focus said the GST will be the most significant reform in India's indirect tax structure since the economy was liberalized 26 years ago.
The GST is set to be implemented July 1. So far, five tiers have been approved: zero, 5%, 12%, 18% and 28% for goods and services.
The GST will cover 1,200 commodities, ranging from spices to alcohol.
According to Metals Focus, a council set up to decide the tax tiers met last week.
"During its two-day meeting the council decided on the rates ... however, there was no consensus on the GST rate for gold and silver bullion and jewelry. As a result, the council will now meet in June. In our view, this will most likely be the last such meeting before implementation on July 1," it said.
A senior banker in Mumbai said 1% sounded too low, although he had heard such market talk.
"Nothing will be known at least until June 3," he said.
A refiner agreed. A wholesaler based in Ahmedabad said that talks are ongoing and that no conclusions have been made -- "it's a waiting game."
An analyst said they didn't think 1% is possible.
"It would mean a revenue loss for the government," the analyst said. "The idea of GST transition is to maintain at least revenue neutrality -- if not revenue gain -- which would be at 2% GST."
To put the GST discussion into context, Metals Focus said gold imports to India currently attract a 10% import duty, 1% value added tax and a 1% excise duty, taking the total tax bill to 12%. VAT and the excise duty will both be replaced by the GST from July onward.
"Overall, we believe that the GST will be set between 3-5%. At the lower end of the band the current incidence of tax would increase by 1%," the Metals Focus said.
The banker in Mumbai agreed.
"I think 1% [representing an overall tax cut] is impossible; 4-5% is more logical," the banker said.
The refiner said the range could be 1-4%.
In a recent note to clients Nell Agate, precious metals strategist at Citi, told clients she expects Indian gold demand to stagnate this year as the GST comes into force.
"A tax of [circa] 4% could be applied from the current 1-2% on precious metals, ultimately increasing the cost the consumer pays. As such, price-sensitive Indian gold demand may stagnate to 650-700 mt this year," Agate said.
India is typically a 700-800 mt/year import market.
