In recent months Indian banks
have launched a major advertising campaign to persuade Indians of the virtues
of paper gold and silver products. It looks like this campaign is bearing
fruit, as Indian investors have rapidly increased their purchases of shares
in gold ETFs. Traders who operate traditional businesses based on trade in
physical metals feel that regulations are favouring
banks and financial service agencies to their disadvantage.
The All India Gems & Jewellery Trade Federation is urging the Indian
government to start taxing purchases of gold ETFs, and is even
calling for the abolition of Indian gold ETFs in order to stimulate demand for
physical metal. Indian citizens are well known for their fondness of physical
gold and silver products. Interest in ETFs has rapidly increased and the current
funds invested in them amount to US$2 trillion.
In recent years the financial
industry has been luring Indian citizens with the argument that ETFs are more
attractive in terms of price and taxes than physical gold and silver products
such as coins, bars or jewellery. The tax on gold
ETFs demanded by the All India Gems & Jewellery
Trade Federation would reduce ETF companies' profit margin by approximately
1% to 3%. The Gems and Jewellery Export Promotion
Council backs these demands.
The Indian government is already
planning to double import duties on precious metals; more taxes will place
yet more burdens on the Indian metals market. As a result, premiums on jewellery in India are rising. In contrast, in Arab
countries such as Dubai the purchase of physical precious metals is not
subject to tax. More and more Indian traders are travelling to Dubai and to
the United Arab Emirates to purchase silver and gold.