Jewelers in Mumbai began an indefinite strike Tuesday in response to the new 1% excise duty on precious metal jewelers, announced by the Modi government in Monday's 2016 budget.
The strike so far only involves jewelers in Mumbai, the country's commercial center, but it is feared the action could spread to other parts of the country following a negative response to the government plans.
In a surprise to much of the country's struggling gold industry hoping for tax relief, the Indian government Monday announced an additional 1% jewelry excise tax in this year's budget, in addition to the 10% import tax already levied.
Duties on gold dore imports were lifted by 0.75% to 8.75% for those operating in a special economic zone in the north of the country.
For refiners outside the economic zone the duty was raised half a point to 9.5%.
"It is excise duty of 1% on jewelry manufacturing units which is causing dismay," a dealer in Mumbai said Tuesday.
"The issue is not even additional expense of 1%. It is the fear of dealing with Excise Department," he added, referring to additional red tape and a new level of bureaucracy.
The jewelry industry is believed to be India's third-largest employer after agriculture and textiles.
A three-week strike in 2012 by India's jewelers forced the country's previous government to reverse plans to impose a similar 1% tax on non-branded jewelry.
As the world's second-largest consumer of gold after China, any prolonged strike action could put the brakes on gold's rally this year.
Gold and jewelry demand in India has already been very weak in 2016 as investors and consumers are deterred by a gold bull run which has seen international prices jump by 20% since the end of December.
The discount paid for physical gold in India to the international price has extended to record levels in recent weeks, heard around $35-40/oz countrywide Tuesday, slightly lower than the levels last week above $40/oz.
Gold represents about a quarter of India's current account deficit, with annual consumption of 900-1,000 mt met almost entirely by imports.
Successive governments have attempted to limit the huge demand through taxation and schemes promoting recycling of available stock in the country.
Ahead of the Monday's budget, a report from the India finance ministry said gold was under-taxed in the country, where the richest 20% account for roughly 80% of gold purchases.
The London Bullion Market Association Gold Price settled at $1,240/oz Tuesday morning, up $5.10/oz on Monday?s close.
