Why Are Gold Smugglers Making More Money Than Legal Importers?

India’s decision to sharply increase gold import duties has triggered concerns of a renewed surge in gold smuggling, with industry experts warning that illegal imports could cross 100 metric tonnes in 2026. The resurgence is being driven by widening price differences between legally imported gold and gold entering the country through unofficial channels, making smuggling highly profitable.

India, the world’s second-largest gold consumer after China, increased import duties on gold to 15% in May as part of broader efforts to curb imports, reduce the trade deficit, and support the rupee. However, bullion dealers and industry officials say the higher tax burden has unintentionally revived incentives for smuggling operations that had significantly declined in recent years.

Grey Market Discounts Reach Record Levels

According to market participants, the grey market discount on gold has crossed $200 per ounce, equivalent to more than 4% of prevailing prices. In contrast, banks and authorized importers are unable to offer comparable discounts due to the taxes and duties applicable on legal imports.

A senior executive at a private gold-importing bank noted that legitimate importers can barely offer discounts of $10 per ounce, while grey market operators are offering discounts many times higher. The substantial price gap has made smuggled gold increasingly attractive for buyers.

Several bullion dealers interviewed across major gold trading centres including Mumbai, Kolkata, Hyderabad, and other markets believe that illegal gold imports may exceed 100 tonnes this year if current market conditions persist.

Potential Loss of Billions in Government Revenue

At current international prices, 100 tonnes of gold is estimated to be worth approximately $14.35 billion. If such quantities enter the country illegally, the government could lose nearly $2.65 billion in import duties and Goods and Services Tax (GST) collections.

Industry experts explain that smugglers avoid paying both import duties and GST, which together amount to approximately 18.45% of the value of imported gold. This tax advantage allows illegal operators to sell gold at steep discounts while still earning substantial profits.

One dealer estimated that the profit margin on smuggling a single kilogram of gold into India currently exceeds ₹25 lakh. Even after offering significant discounts to customers, smugglers continue to earn substantial returns due to the tax savings.

Duty Cut Had Earlier Reduced Smuggling

The expected resurgence marks a sharp reversal from recent trends.

According to data compiled by the World Gold Council, gold smuggling into India had fallen dramatically after previous reductions in import duties. Illegal imports declined from 156.1 tonnes in 2023 to 69.2 tonnes in 2024 and fell further to just 20.4 tonnes in 2025.

Before those duty reductions, India had witnessed average annual gold smuggling of approximately 108 metric tonnes over the preceding decade.

Industry observers now fear that the latest tariff increase could undo much of the progress achieved in reducing illegal gold trade.

Legal Gold Market Under Pressure

The impact is already being felt in the formal gold market.

India imported 45.6 tonnes of gold in April, but bullion dealers estimate that imports may have dropped by nearly half in May as banks and refiners reduced overseas purchases amid shrinking demand for legally imported gold.

The large discounts available in the grey market have forced legal sellers to reduce prices significantly in order to clear existing inventories. Domestic discounts on legally imported gold have reportedly widened beyond $100 per ounce, putting severe pressure on refiners and importers.

Refiners Face Profitability Challenges

The tariff hike has also affected India’s gold refining industry.

James Jose, Managing Director of refiner CGR Metalloys, said that the steep discounts in the domestic market have made refining operations increasingly uneconomical.

India imposes a slightly lower import duty on gold dore—a semi-pure alloy used by refiners—than on refined gold. However, the current market distortions have significantly reduced the incentive to import dore for refining.

According to Jose, gold refiners typically operate on margins of around 0.65%. With market discounts now substantially exceeding that level, refiners are finding it difficult to maintain profitability and justify fresh imports.

Industry Warns of Growing Parallel Market

Bullion industry participants warn that unless the price differential between legal and illegal gold narrows, India could witness the rapid expansion of a parallel gold market.

Higher duties may help curb official imports, but experts caution that excessively large tax differentials often encourage underground trade, ultimately reducing government revenues while hurting legitimate businesses.

With smuggling networks reportedly becoming active again and legal importers struggling to compete on price, the coming months will be crucial in determining whether India‘s latest gold duty hike achieves its intended economic objectives or inadvertently fuels another wave of illicit gold inflows.