Home Finance & Markets How does India – UAE CEPA effects the gold trade?

How does India – UAE CEPA effects the gold trade?

It may cause market distortion in India by raising prices across the board and may have an effect on the Indian refining sector, which would have to compete with more affordable imports.

India - UAE CEPA effects the gold

India and UAE (United Arab Emirates) signed a historic Comprehensive Economic Partnership Agreement in February 2022. (CEPA). It is the first comprehensive free trade agreement India has signed in more than ten years. More than 11,000 products and services will be covered by the CEPA, giving the UAE duty-free access to more than 90% of Indian exports. Last month, the agreement went into effect.

This is a major development because, after the US and China, the UAE is India’s third-largest trading partner, with yearly bilateral trade of about $59 billion. The majority of the $29 billion worth of goods that India exported to the UAE before the agreement are now duty-free. Previously, a 5 percent import tax was levied. Now, the Indian government wants to boost exports to $40 billion in the near future and $100 billion in the long term. The CEPA is anticipated to create 1 million jobs across a number of labor-intensive industries.

To increase trade between the two states, the Ministry of Commerce, which negotiated the CEPA with the UAE, has been concentrating on the gems and jewellery (G&J) industry. Due to the long-standing commercial ties between these markets, the G&J industry is essential. UAE was the second-largest supplier of bullion to India and the country’s top importer of jewellery for decades, until the US overtook it in 2021. India imported 120 tons of gold bars from the UAE last year and exported gold jewellery worth about $2.7 billion.

In actuality, jewellery exports to the UAE before the pandemic totaled $5–6 billion. In addition, the UAE serves as a significant entrepôt for Indian jewellery. The Indian diaspora purchases items imported from India in the UAE and, through re-exports, across much of the GCC and North Africa. Indian jewellery exports were subject to a 5% import tax prior to the announcement of the CEPA, as was previously mentioned. Since the new trade agreement went into effect last month, Indian jewellery can now be imported duty-free into the UAE.

Focusing on precious metals flows, Chapter 71 of the HS Trade Code will have an impact on the precious metals trade under CEPA. Various commodities fall into various categories under the CEPA, including the Tariff Elimination Immediate (TEI), Tariff Elimination Phased (TEP), Tariff Reduction (TR), and Tariff Rate Quota (TRQ). TEI include imports of waste, sweepings, and scrap made of precious metals. Importers would then be able to do so right away at a duty rate of 0%. The import duty for silver bars, however, falls under the TEP category and will be gradually eliminated over the course of five years. Silver can currently be imported with a 9.5 percent concessionary duty.

While eligible importers can only bring in gold at 9.75 percent under the TRQ category, which includes gold bars, there is a limited quota for each year.

India is only permitted to import 120 tons of gold from the UAE during the first year of the TRQ regime. The TRQ will then rise by 20 tons annually until it reaches a maximum of 200 ton at the end of the fifth year. Although there are concessions for gold and silver, we think the majority of gold would be imported under the CEPA. We believe that only a small amount of silver is likely to originate from the UAE.

It is crucial to note that, according to CEPA, any metal imported must adhere to the rules of origin standards, which effectively means it must be refined in the UAE. There isn’t enough silver available to meet the needs of the sizable Indian silver market due to Dubai’s limited silver refining capacity. Moreover, LBMA bars from the UK, Hong Kong, and, to a lesser extent, China account for more than half of Indian silver imports. The three HS codes 710811, 701812, and 710813 are used to import refined bullion into India, where importers are required to pay a 10.75 percent customs duty. According to CEPA, importers will be permitted to bring in gold at a 1 percent concession, making the actual duty 9.75 percent.

Before the specifics of CEPA were made public, the market was worried that certain market participants would import a significant amount of gold in a single trade, disrupting the market by causing a significant discount. To prevent this, a cap has been placed on the amount that may be imported each quarter. Each quarter, the TRQ will be distributed equally, and under the concessional regime, only 30t of gold will be imported.

Even though, in order to import gold, a number of requirements must be met. Market participants must submit an application to the Director General of Foreign Trade for a quota allocation. The applicant must be a gold-related jewellery manufacturer with an average annual revenue of Rs. 250 million over the previous three fiscal years. The import quantity applied under the TRQ should be equal to or less than the jewellery produced, with about 90% of this consisting of gold jewellery.

At the time of consignment clearance, the importer must present a certificate of origin issued by the pertinent authorities in the UAE after the TRQ has been issued to the manufacturer and they have imported the metal.

Local refineries in the UAE are required to refine the metal. Additionally, the TRQ will only permit UAE good delivery bars. Last but not least, the International Financial Services Centres Authority (IFSCA), which oversees the India International Bullion Exchange, has only authorised the import through the nominated agencies, such as banks or qualified jewellers ( India International Bullion Exchange IFSC (IIBX)).

The HS code 7112 had caused a lot of concern among market participants as gold jewellery, industrial scrap, and sweepings were all allowed for duty-free importation according to the CEPA document. Additionally, since they fell into the “free” category, anyone could import them without submitting a licence application.

The flow of “scrap” between the UAE and India would have increased had such an unrestricted import been permitted. Additionally, because Indian refineries import doré (semi pure alloy) at a rate of 10.1%, it would have been unprofitable for them to operate. However, the government announced that it was transferring goods imported under 7112 into the restricted category just two days before the CEPA was set to take effect. This implies that anyone wishing to import these materials must submit an application for a licence. As a result, even if these licences are requested, it may not be granted.

As a result, while CEPA is expected increase trade between the UAE and India but it may also cause market distortion in India by raising prices across the board. It might have an effect on the IIBX as well because there might be fewer trades there. Additionally, CEPA may have an effect on the Indian refining sector, which would have to compete with more affordable imports.

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