The impact of the new budget on India’s luxury market

Diamond gold ring by Indian designer

The yearly budget draft presented this week by Finance Minister Pranad Mukherjee has already been generating strong criticism from several luxury sectors, especially auto and jewellery.

In the new budget, the customs duty on standard gold would double, to 4% and on non-standard gold to 10%. Earlier this year, the government had raised the import duty on gold from 1% to 2%. This move is expected to impact gold buying. In 2011, India’s jewellery demand fell by 14% at 567,4 tonnes against 657,4 tonnes in 2010. The All India Gems and Jewellery Trade Federation organized a 3 day strike from Friday, 3 lakh gold jewellers  across India keeping their stores shut till Monday.

The new taxation on gold is likely going to impact the pricing of imported luxury branded jewellery, CPP’s Oliver Petcu estimating an increase in prices of up to 5%. This can only be bad news for international jewellers already present or planning to expand to India. Already, international luxury branded jewellery sells in India at least 20% higher than in Europe.

According to the new budget presented by India’s cabinet, imported large cars such as SUVs/MUVs will be applied a basic customs duty of 75% instead of 60% previously, thus making these types of cars more expensive.

With an increase in customs duties, excise duties, service tax rates and more services to be included in the spectrum of the service tax law, through introduction of ”negative list” for services”, the input indirect tax cost for the retail sector would increase. It is yet uncertain how would this be directly translated into an eventual increase in prices, including the fashion and accessories retail sector in India.