The import duty on gold jewellery was increased to 15% from 10% on Tuesday, in a move aimed more at protecting the domestic jewellery industry rather than stemming overseas purchases to narrow its current account deficit.
The import duty on bullion however, remained unchanged at 10%. By keeping the import tax on jewellery higher than that of bullion price-conscious consumers would be forced to buy those manufactured within India, the world's top gold consumer.
While the tax hike is part of India's efforts to curb gold imports, it is unlikely to have a significant impact since jewellery accounts for only a small portion of the country's gold imports.
India's imports of gold jewellery stood at $137.57 million between April and July, a fraction of total bullion imports, which in July alone were valued at $2.9 billion.
"To protect the interests of small artisans, the customs duty on articles of jewellery ... is being increased," the finance ministry said in a statement late on Tuesday.
India has taken several steps this year, including raising the tax on bullion imports three times, to curb demand of the precious metal to reduce its trade deficit and support a weak rupee. Gold is the biggest non-essential item in India's import bill.
"While gold jewellery imports represent less than 10% of overall gold imports, this will add to the negative sentiment present in gold at the moment," ANZ analysts wrote in a note.
At just below $1,300 an ounce, spot gold is down 22% for the year, and looks headed for its first annual decline in 13 years, as investors brace for a pullback in the U.S. Federal Reserve's economic stimulus that has burnished the metal's inflation-hedge appeal and helped lift it to a record high above $1,900 in 2011.
A boost for local artisans
The hike in the duty on jewellery was demanded by the domestic industry on concerns over imports of cheaper jewellery from Thailand, Malaysia and elsewhere. "This is a good move for the local industry and it will support the manufacturing sector," said Haresh Soni, chairman of the All India Gems and Jewellery Trade Federation.
India's jewellery industry numbers about 400,000 retail jewellers and is largely made up of tiny market shops owned by the same families for generations.
The raise in duty comes as India is about to enter a peak buying period ahead of festivals and wedding season that starts in October.
There have been no fresh supplies into India since July 22 when the Reserve Bank of India issued tough new rules tying imports to export volumes.