With the current account deficit hitting a record high, Finance Minister P. Chidambaram has indicated that the duty on gold may be raised. At the same time, the Finance Ministry has sent out a strong warning to indirect tax evaders to pay up the duty or face “serious consequences.”
The Government is considering raising the import duty on gold by at least 1 percentage point (currently, 4 per cent). A decision on this may be taken before the Budget. In the last Budget, the Government raised the import duty in order to check the growing current account deficit.
According to RBI data, the current account deficit for the first half of this fiscal stood at $38.7 billion, or 4.6 per cent of GDP, against 4 per cent during first six months of 2011-12.
Temper gold demand
Addressing a press conference, Chidambaram said, “I would appeal to the people to moderate the demand for gold which leads to large import of gold. I may add that we may be left with no choice but to make it a little more expensive to import gold. This matter is under Government’s consideration.”
Gold constituted a substantial chunk of imports. “Suppose gold imports had been one half of the actual level, that would have meant that our foreign exchange reserve would have increased by $10.5 billion,” the Minister added.
He also said the country cannot afford to spend so much on importing gold. During 2011-12, gold imports stood at $56.2 billion.
On reports of gold smuggling, Chidambaram said such reports were mostly speculative. “Maybe some smuggling has taken place but whatever level of duty, there is always smuggling.”
Although gold import has been declining, the problem is that its share in the total current account deficit is still very high. And with the decline in overall exports, the situation is getting worse. In the first half this fiscal, exports fell sharply, by 7.4 per cent, while imports recorded a smaller decline of 4.3 per cent, leading to a wider trade deficit.
FDI fills the gap
However, the Minister remarked that notwithstanding the widening of the CAD, the positive aspect is that the CAD was financed without drawing on reserves. This was mainly due to adequate inflow of FDI ($12.8 billion) and FII ($6.2 billion).
In addition, external commercial borrowing amounted to $1.7 billion. “The net result is that we have not drawn on the foreign exchange reserves and, in fact, there is a marginal accretion of $ 0.4 billion to the foreign exchange reserves,” he said.
The Government has targeted to keep the current account deficit at 3.7 per cent of GDP for 2012-13. “I am confident that even if the year ends with a slightly larger CAD than last year, we would be able to finance the current account deficit without drawing upon reserves,” he said.
Warning TO Tax Evaders
In the meantime, the Finance Ministry has come out with a fresh warning for indirect tax evaders, at a time when the tax collection is much below the budgeted target.
Indirect tax collection grew at a moderate rate of 16.8 per cent to Rs. 2.92 lakh crore in the April-November period, against the annual growth target of 27 per cent.
Revenue Secretary Sumit Bose spelt out action against offences related to Customs duty, excise duty and service tax evasion. It includes tax with interest and penalty and, in some cases, attachment of property and arrest and prosecution.