The government has hiked the import duty on gold to 15% from 10.75% earlier.
The decision comes in view of the falling Indian rupee which last week hit a record low of Rs 79 against the US dollar
The increase in import duty is likely to give a rise to gold smuggling to a large extent for evading tax. As a result, the government stands to lose a huge amount of revenue from tax collection.
The government is watchful and mindful of the impact of the falling rupee on the country's imports, finance minister Nirmala Sitharaman said last week.
"The Reserve Bank of India is very keenly watching the exchange rate. We are not alone in this world. We are also open as an economy... the rupee against the dollar and other currencies versus the dollar, the rupee has performed relatively better," she said.
India is the world's second-largest gold consumer and the country has hiked import duty on gold as the surge in imports was putting pressure on the current account deficit (CAD). With this, the government aims to reduce gold imports and preserve foreign reserves.
Finance Ministry said there has been a sudden surge in imports of gold. In the month of May, a total of 107 tonnes of gold was imported and in June also the imports have been significant.
As per government data, gold imports surged by nearly 790%, the highest ever in a year, in May 2022.
According to the World Gold Council, India imported the most gold in a decade in 2021. The country's gold purchases had been picking up in the past year after buying slumped during the pandemic.
This surge has likely put pressure on the Indian rupee which has been depreciating against the dollar.
The decline in gold imports may help stabilise the currency, and forex reserves and reduce the trade deficit. The trade deficit in April and May
2022 stood at $20.1 billion and $24.6 billion respectively. By comparison, the trade deficit in April and May 2021 stood at $21.8 billion.
While petroleum import is leading to a rise in the same, gold too contributed significantly to it. In May 2022, gold imports stood at $6 billion as against gold imports of $670 million in the same month last year.