Above and Beyond Duty

India’s move to raise import duty on gold and silver from 6% to 15% is a trade measure, but the instruments used are also a federal revenue choice. The headline numbers are straightforward enough. Basic customs duty on gold and silver has been doubled from 5% to 10%, while the Agriculture Infrastructure and Development Cess, or AIDC, has been raised fivefold from 1% to 5%.

What matters, however, is not merely the level of taxation but its architecture.

Under India’s fiscal federal structure, customs duties form part of the divisible tax pool shared with states according to the Finance Commission formula. Cesses do not. Article 270 of the Constitution excludes cesses and surcharges levied for specific purposes from the divisible tax pool. That means every additional rupee collected through AIDC largely remains with the Centre.

The arithmetic makes the incentive clear.

Suppose India imports gold worth ₹100. Under the old structure, ₹5 was collected as basic customs duty and ₹1 as cess. Of the basic customs duty, roughly 41%, or about ₹2.05, eventually flowed to states through tax devolution. The cess remained entirely with the Centre. In effect, of the ₹6 collected as basic customs duty and cess, the Centre gets ₹3.95, while the states receive ₹2.05, or 34.2% of the total tax.

Under the new structure, basic customs duty rises to ₹10 and the cess to ₹5. States now receive roughly ₹4.10 from the customs duty, but nothing from the cess. The Centre retains ₹5.90 from customs duty after devolution, along with the full ₹5 cess, taking its effective share to about ₹10.90, or 72.7% of the tax.

In other words, of the ₹9 increase in the levy, states receive barely ₹2 more, while the Centre captures nearly ₹7.

That asymmetry is not accidental. Over the past decade, New Delhi has steadily increased its reliance on cesses and surcharges across multiple taxes, drawing repeated criticism from states, especially those ruled by opposition parties. Outgoing Kerala Chief Minister Pinarayi Vijayan has argued that the growing use of cesses and surcharges is shrinking the divisible tax pool and weakening fiscal federalism. Karnataka Chief Minister Siddaramaiah recently complained that the Centre collected huge sums through cesses and surcharges while states received “not a paisa” from them.

The 2021 fuel-tax restructuring remains the most frequently cited example. When the Centre imposed an AIDC of ₹2.50 per litre on petrol and ₹4 per litre on diesel, it simultaneously cut components of excise duty so that the burden on consumers did not rise immediately. The effect was to increase the Centre’s retained share because cess collections are not devolved.

The government’s defence has been that these funds ultimately return to states through centrally sponsored schemes and welfare spending. That argument is not entirely without merit. In periods of macroeconomic stress, the Centre arguably needs greater fiscal flexibility than states to manage currency pressures, external shocks and subsidy burdens.

Yet the repeated disproportionate use of cesses is bound to invite closer scrutiny.

One could argue that if the objective was purely to curb imports, the Centre could have achieved it through a larger increase in basic customs duty alone. The decision to raise the cess disproportionately shows how economic stress can strengthen fiscal centralisation in India.

However, the current backdrop is one of macroeconomic stress, not merely revenue mop-up.

India is facing a worsening external balance situation following the escalation in West Asia. Brent crude is trading above $100 a barrel, putting pressure on the current account deficit and the rupee. Gold imports themselves have become a major drain. India’s gold imports touched $71.98 billion in 2025-26, while silver imports more than doubled to $12.05 billion. Together, they have become a sizeable pressure point for the balance of payments at a time when oil imports are already swelling the import bill.

Seen through that lens, the gold duty hike is less about fiscal opportunism and more about defending macroeconomic stability. The government wants to curb non-essential imports, protect foreign exchange reserves and reduce speculative demand for bullion amid global uncertainty.