What the gap is made of

The gap between the Indian gold price and the international price is not a single number. It is the sum of import duty, the cost of landing metal in the country, a domestic premium that rises and falls with demand, and a tax charged on the purchase. This page describes each component and which of them changes from week to week.

Import duty

Import duty is a tax charged on gold brought into the country. It is set by the government and changes rarely, but when it changes, the gap moves immediately. The duty is paid on the value of the metal at the border, and it is passed on to the buyer in the price of every gram.

Import duty is the largest component of the gap that is set by policy. It does not change from week to week, but it is the reason the Indian price is always above the international price. A reader who sees a large gap is seeing, in part, the government's decision to tax gold imports.

The cost of landing metal

Landing costs are the charges for bringing metal into the country: freight, insurance, handling and the cost of converting a large bar into smaller bars. These costs are small compared to duty, but they are real and they are paid on every gram. Landing costs do not change from week to week, but they vary with the size of the shipment and the distance travelled.

Landing costs are not published anywhere, and this site does not estimate them. They are included in the domestic premium measured here, but they are not separated out. A reader should know that the premium is not all demand; part of it is the cost of moving metal.

The domestic premium

The domestic premium is the part of the gap that rises and falls with demand. It is the extra amount buyers are willing to pay over the landed cost, and it changes from week to week. It rises in the wedding season, falls in the quiet months, and spikes when the international price falls and buyers rush in.

The premium is not set by any authority. It is the result of supply and demand in the domestic market. When demand is high and supply is tight, the premium rises. When demand is low, the premium falls. The premium is the most variable part of the gap, and it is the part that changes from week to week.

The tax on the purchase

The tax on the purchase is the goods and services tax, charged at three per cent on the price of gold. The tax is charged on the total price, including the duty and the premium. The tax does not change from week to week, but it is the last component added, and it is the part the buyer sees on the invoice.

The association's rates are published before tax; where this site shows what a buyer pays, the tax is added and labelled as such. The after-tax figure is the price a buyer would pay at a counter that charges no making charge. The tax is not a part of the premium, but it is a part of the gap between the buyer's price and the international price.

Which part changes from week to week

The domestic premium is the part that changes from week to week. Import duty, landing costs and the tax are fixed in the short run. The premium moves with demand, and it can change by the hour on a busy day. The premium is also the part that is most visible in the table above: when the gap widens or narrows, it is usually the premium moving.

The premium is not published anywhere, and this site measures it by subtracting the international price from the domestic benchmark. The result is a percentage that falls inside a band of zero to twenty-five per cent. A reading outside that band is refused, and nothing is written that run.

Who sets each part

Import duty is set by the government. Landing costs are set by the market for freight and insurance. The domestic premium is set by the market for gold in India. The tax is set by the government. Each part has a different setter, and each part responds to a different signal.

A reader who wants to understand the gap should ask which part moved. If the gap moved on a day when the government did nothing, it was the premium. If the gap moved on a day when the rupee moved sharply, it was the exchange rate. The gap is a sum, and each part has its own story.