MUMBAI (Reuters) - An increase in taxes on gold sales in India could curb short term demand from the world's No. 2 consumer of the metal, the World Gold Council (WGC) said.
Faltering appetite in a country where gold is used in everything from investment to wedding gifts could further drag global prices, already trading near their lowest level in eight weeks.
"In the short term at least, we believe (the tax) may pose challenges for the industry," said Alistair Hewitt, director of Market Intelligence at WGC.
"Small-scale artisans and retailers with varying degrees of tax compliance may struggle to adapt," Hewitt said in the report published on Gold Investor quarterly magazine on Thursday.
As part of a new nationwide sales tax regime that kicked in on July 1, the goods and services tax (GST) on gold jumped to 3 percent from 1.2 percent previously.
There have been fears the tax increase could stoke under-the-counter buying and spur appetite for precious metal smuggled into India, where millions of people store chunks of their wealth in bullion and jewellery.
Longer term, the GST will have a positive effect by making the gold sector more transparent and improving the supply chain, said Hewitt.
The WGC also said a government move to ban cash transactions over 200,000 rupees ($3,090) from April 1 could hurt gold demand in rural areas where farmers often purchase the metal using cash due to limited access to cheques and electronic payment systems.
Two-thirds of India's gold demand comes from rural areas, where jewellery is a traditional store of wealth.
The transactions rule's "potential impact isn't entirely clear: it could curb gold purchases; it could encourage gold shoppers to buy smaller amounts of gold spread over more transactions; or it could push a large part of demand underground and encourage a black market in gold," Hewitt said.
The WGC kept its 2017 gold demand estimate for India at 650 to 750 tonnes, well below the average annual consumption of 846 tonnes in the past five years.
"Over time however, we anticipate that economic growth should push demand higher. By 2020 we see Indian consumers buying between 850 tonnes to 950 tonnes of gold," he said.
($1 = 64.7675 Indian rupees)
(Reporting by Rajendra Jadhav; Editing by Joseph Radford and Manolo Serapio Jr.)