Jaitley’s Budget promises Acche Din for Gold; Will monetisation scheme lead Gold to newer highs?

In Budget 2018, Finance minister Arun Jaitley has brought back the Long Term Capital Gains tax and the markets have been rattled ever since.

Jaitley’s move was an unexpected blow for those invested in equities, especially since it did not revoke the Securities and Transaction Tax that had earlier replaced the Long Term Capital Gains Tax. There was severe discontentment and even confusion amid investors.

However, the good news for such investors at the moment if the fact that Gold and real estate are out of the LTCGT ambit. This could hence result in investors flocking from equities to other asset classes such as Gold and Real estate to avoid double-taxation of STT plus LTCG levied on funds, and equity markets. A handful of media entities meanwhile suggested that Gold price may increase, after Jaitley announced a customs duty tweak. But documents made available on the Finance ministry website suggests that this is only for products classified under HS code 7106 and 7108, where the duty has been hiked from Nil to 3 per cent. Gold jewellery is classified under the HS code 7113. 7108 refers to gold plated with platinum or unwrought or in semi-manufactured form or in powder form. It will be safer to hence assume that there is no call on tweaking ​either ​​the ​import duty on jewellery or even Bullion.

Jaitley also announced a “comprehensive Gold Policy to develop gold as an asset class.” He spoke of a consumer friendly and trade efficient system of regulated gold exchanges in the country. Also sa​id,​ Gold Moneti​s​ation Scheme will be revamped to enable people to open a hassle-free Gold Deposit Account. Gold is intrinsic to India’s social and economic way of life and it is ​good that the government recognized the important role, gold played in supporting economic growth and needs of the populus.

Aram Shishmanian, CEO of the World Gold Council​ said, “This is not the first time that a gold monetisation scheme has been spoken of. There was a similar scheme in 2015-16 budget, which spoke of depositing Gold in lieu of interest being paid against value of gold deposited. Jaitley had back then too proposed that deposit certificates issued under the scheme be exempt from the definition of a capital asset and thereby be exempt from capital gains or even any form of a transaction tax. It will be interesting to see, how the nitty-gritties to the monetisation scheme pan out. Till then Gold is expected to maintain an uptick, with the condition that global factors remain consistent as on date.”

Any ​US ​Fed announcements or geopolitical tensions can lead to an upward trend for Gold. Will GDS Succeed? The Morarji Desai government was the first to lay a policy in 1962 for Gold deposits. Subsequent governments formulated various policies in order to bring gold from households into a formal system. Before the one announced in 2018, the ministry headed by Jaitley had sought a similar scheme in 2016 too. Various governments so far have tweaked policies to formalise nearly 22000 tonnes of Gold estimated at over $1 trillion into the economy. But results across various policies have been met with stiff customer resistance.

Two years ago, Anantha Padmanabhan, Southern region head for the All India Gems and Jewellery Trade Federation was quoted saying “the present scheme will not bring even 20 tonnes of gold.” This is what previous governments managed to collect from the Gold Deposit scheme, Amnesty, has always been the demand of customers wanting to deposit into the Gold deposit. The details of the 2018′ scheme havent been publicly announced. But Jaitley has declared that this would be a comprehensive one. Would it have a clause on Amnesty? This would be a matter of speculation. spoke with Prithviraj Kothari, the Managing Director at Riddhi Siddhi Bullions. He observed that the gold deposit schemes have largely been marketed for bringing gold from temples, but should have scope to include commoners, and jewellers too. He compared the deposit schemes to public depositories from the 1997 period. “In 1997, the gold depositories allowed anyone to open a gold deposit scheme,” he said. Click here to read about benefits of the Gold Monetisation Scheme to depositors TAX FEARS Kothari suggested, that the deposit scheme should have clauses to protect depositors from the tax department. He said, “Streedhan upto 500 grams, Gold for Children upto 250 grams,” could be examples of parameters that the new Gold deposit scheme could look at.  On the aspect of amnesty as a demand, Kothari found that the industry already observed KYC data and hence amnesty may not be a necessity.

“Most of our transactions, especially the ones above `2 lakh are conducted via cheques today, there is very limited cash. There should be an incentive to deposit grams of Gold as well as Kilos of gold,” he said. Kothari further added that there was a long way still for Gold consumption to improve. “in a country of 125 crores, we observe 5-6 million marriages each year, and the consumption is less than 1 gram per annum per person.” While the ministry is expected to bring the revised and comprehensive Gold Deposit Scheme, factors such as amnesty, and popularity among masses will be much appreciated to make it a hit.

The World Gold Council, found in a report, the following reasons that resulted in a lack of allure for the policy in recent years.

  • Few banks offer the Gold Deposit Scheme (GDS). Those banks that do have GDS, set the minimum deposit amount at anywhere between 500g to 1kg of gold, making the Scheme more suitable for temples than individuals.
  • The product is not widely marketed
  • Banks cannot easily assay the gold to decipher its caratage and purity. As interest on the GDS is typically paid in grams of gold, banks cannot offer the product unless they can quickly ascertain its quality
  • Banks do not accept jewellery under the GDS, assuming that customers will not want to deposit jewellery and receive plain gold when their investment matures.

Courtesy: Sify Finance