GST woes: India's gold imports to fall in H2; smuggling seen rising, says WGC

India's gold imports will likely drop in the second-half of the year from the first six months after jewellers rushed to stock up ahead of new taxes introduced on July 1, the World Gold Council (WGC) said on Thursday.

Faltering appetite in a country where gold is used in everything from investment to wedding gifts could rein in a rally in global prices, trading near their highest level in seven weeks.

"Expecting higher (taxes), certainly some of the imports and some of the demand from the second-half were advanced in the June quarter," Somasundaram PR, Managing Director of WGC's India operations, told Reuters.

As part of a new nationwide sales tax regime introduced in July, the goods and services tax (GST) on gold jumped to 3 percent from 1.2 percent previously. Jewellers have to pay that tax when buying gold imported by banks, while their customers must also pay when making purchases.

India is the world's No.2 gold consumer. The country's demand for the metal in the first-half rose 30 percent from a year ago to 298.4 tonnes, but imports during the period more than doubled to 518.6 tonnes, the WGC said in a report published on Thursday.

India's gold imports typically strengthen in the second-half of the year as the precious metal is considered an auspicious gift at festivals such as Diwali and Dussehra.

Indian gold demand is expected to remain subdued for a few weeks as "consumers who have recently purchased are unlikely to do so again in the short term", the WGC said.

There have been fears the tax increase could stoke under-the-counter buying in India, where millions of people store chunks of their wealth in bullion and jewellery.

Gold smuggling into India is likely to rise in 2017 from last year's around 120 tonnes as the hike in sales tax has effectively lifted margins for "grey market" operators amid transition to the new tax system, Somasundaram said.

"Already there is transitional challenge on GST. On top of it, if customs duty remains high, it could push a lot more trade into the grey market," he said.

India raised import duties on the metal to 10 percent in a series of hikes to August 2013, looking to curb demand to narrow a gaping current account deficit.

Despite robust demand in the first half, the WGC kept its forecast for India's full-year demand at 650 tonnes to 750 tonnes, lower than a 10-year average of 845 tonnes, but just above last year's level.