Tax Policy Change in India Could Boost Gold Demand

(June 22, 2017 - by Paul-Martin Foss)

The Indian government has recently introduced a unified Goods and Services Tax (GST) that will replace the current tax system. The GST will replace a system that currently includes over a dozen different types of taxes, duties, and excises. Under the new system, gold will be taxed at a rate of 3%. While this is higher than the current tax rate, the fact that it is lower than was expected and the fact that it is unified across the country is expected to boost gold demand in India.

Indian Gold Demand Drives World Markets

India is the world’s largest consumer of gold, and actions that affect the Indian market reverberate worldwide. Indians hold a significant amount of their wealth in the form of gold jewelry. Jewelry sales are particularly strong before and during the wedding season, which normally runs from October through December.

The Indian government has looked skeptically at gold ownership for a long time. Private ownership of gold and a thriving gold market allows citizens to maintain their wealth in the form of gold. They are not reliant on government currency or the banking system, which allows them to remain independent from the government’s monetary policy.

The Indian government doesn’t like this, as it would like to be able to engage in monetary policy to influence the economy. It has taken various steps over the years to try to monetize gold holdings in India, inducing religious temples and private citizens to turn over their gold holdings to the government in exchange for rupees. These monetization schemes have been largely unsuccessful.

Government Attempts at Taxing Gold

The Indian government has also introduced taxes on gold importation in order to stifle demand for gold. While demand has slowed due to high taxes, it still remains the highest in the world. High import taxes have also led to significant amounts of smuggling, as smuggled gold can be sold cheaper than gold brought in through official channels.

If Framework Stays Constant, Good for Gold Market

The new GST has a special carve-out for gold, which will be taxed at a special 3% rate. If this rate is maintained into the future, and gold is not pushed into one of the higher GST tax brackets, then it will provide some much-needed stability. As long as the government keeps its hands off the gold market, this new-found stability should result in a rise in demand for gold.

What This Means for American Investors

Because India is such a large driver of the gold market, anything that boosts demand in India is good news for American gold investors. Increased demand in India will mean an increase in gold prices, bringing bigger returns on investment. American investors also have a plethora of gold investment options that aren’t available to investors in India. One of those is gold IRAs.

Gold IRAs offer the same tax benefits as conventional IRAs, allowing investors to use pre-tax dollars to invest in gold. For investors who are looking for wealth preservation or long-term stability of their investments into retirement, gold IRAs are an attractive option. Since gold steadily increases in value over time and maintains its purchasing power against inflation, gold IRAs are a good way to ensure the stability of retirement savings over many decades and throughout all economic conditions.