The Goods and Services Tax (GST) is likely to pose challenges for the gold demand in the short term when small-scale artisans and retailers may struggle to adapt to the new tax regime, the World Gold Council (WGC) today said.
"In the short term, we believe GST may pose challenges for the industry. Small-scale artisans and retailers with varying degrees of tax compliance may struggle to adapt," WGC Director, Market Intelligence, Alistair Hewitt said in the fourth issue of magazine 'Gold Investor'.
He said on June 3, the GST Council announced a 3 per cent rate for gold bullion and jewellery.
The gold industry reacted positively to this as there had been fears that it could have been higher, perhaps 5 per cent or more, Hewitt added.
"Our econometric research into data spanning 26 years indicates the tax may pose a headwind to gold demand, because it pushes up the overall tax rate consumers face," he said.
Despite these possible obstacles, Hewitt said WGC believed demand is unlikely to go down further, after falling so sharply last year.
The gradual remonetisation of the economy, the bumper crop after a good monsoon and the Central government employees and pensioners' inflation-busting wage hike can support economic growth in 2017, he said.
Further, he said, the economy can benefit from the increasing young Indians entering the workforce - a demographic dividend similar to that which support the growth of Asian Tiger economies during the 1980s and 1990s.
All these factors should boost India's economic growth and support gold demand, he added.
Hewitt, however, said in the long-term GST will have a positive effect on India's economy and its gold industry.
"GST should eliminate double taxation and improve supply chain efficiencies. It can make the gold industry more transparent which, coupled with recent hallmarking legislation, should ensure buyers have confidence in the gold products they buy, rather than continuing to suffer from the gross level of under-carating they have previously endured."
The WGC continued to remain cautious for 2017, expecting consumers to buy between 650-750 tonnes gold, an increase from the 666 tonnes purchased in 2016. This is well down from an average annual demand of 846 tonnes between 2012 and last year.
"Over time, however, we anticipate that economic growth should push demand higher. By 2020, we see Indian consumers buying between 850-950 tonnes of gold," he added.
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