Why India's latest gold paperization scheme will fail like the last one


Gold Monetization: Tax-free Interest on Deposits Is Good but Scheme May Fall Short on Many Counts

By S. Murlidharan
Firstpost, Noida, India
Wednesday, May 20, 2015


From a forbidding level, except for temples and rich persons, of 500 grams, the just released draft paper allows one to deposit gold as low as 30 grams with banks and earn interest reckoned also in gold.

To wit, if a bank offers to pay 1 percent interest and you have deposited 100 grams, at the end of the year, which is the minimum term for which a lot of 30 grams and more has to be deposited, your gold account would have grown to 101 grams.

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There will not be any tax on the monetary value of one gram of gold earned as interest. Nor would there be any capital gains tax on the redemption amount or gold received.

In other words, if you had deposited 100 grams valued at Rs 2,500 a gram for one year at the end of which you get back the same gold valued now at Rs 2,600 a gram either in gold or in cash, the extra Rs 100 per gram will not attract capital gains tax.

While exemption from capital gains tax is a continuation of the same policy, the exemption proposed on interest is new, and could be the much-needed sweetener to an extent.

Banks are free to choose the rate of interest which is good for competition and depositors. So far so good.

The moot question is will the inhibitions that marred the earlier gold deposit scheme vanish. The answer sadly is in the negative.

The metal would be melted as hitherto much to the dismay and chagrin of women folk, to whom melting mangal sutra for example is abshagun, inauspicious and a strict no-no. That our ladies routinely lose out to the wicked jewelers on account of wastage but are finicky about melting on sentimental grounds need not detain us.

The tax exemptions mean a lot for those in the 30% income tax bracket as it would heighten the post-tax return on investments but temples and shrines like Tirumala Tirupati Dewastanam (TTD), Shirdi Sai Baba Trust, Mata Vaishneo Devi trust etc. are in any case tax-exempt.

And there is no guarantee that tax sleuths will not come calling hot on deposit, asking for the source, the irritant that bedeviled the earlier schemes as well.

Black money in this country finds sanctuary in real estate and gold. Gold has never come tumbling out of cupboards, lofts, and lockers enticed by interest, which pales before the tax consequences.

It is not also clear why an account holder should state upfront at the time of deposit what he wants on redemption -- cash or gold. In all fairness, she should have been allowed this choice at the point of redemption.

There could be other avoidable troubles as well when the process is initiated. First, one has to find the nearest BIS-approved hallmark assaying center for valuation.

The valuation certificate along with KYC norms fulfillment at the bank would lead to the next step -- melting. It is not clear if bank branches operating the scheme would all have melting facilities. It would have been better if assaying centres did the job of melting as well.

In any case, it is heartening to note from the draft that melting will not take more than 3 to 4 hours which is a vast improvement over the huge time taken in sending jewelry and gold to smelters in Italy, France, etc. earlier.

All in all it's old wine in new bottle except that the bottle is a more conveniently sized 30-gram container. But it is unlikely that even a minuscule part of the guessstimated 20,000 metric tonnes of gold the country has is going to come into circulation and apply the brakes on gold imports that accentuate our current account deficit.

Under the extant scheme, hardly 4,000 kilograms have reportedly been mobilised, a drop in the ocean. Would higher interest engendered by competition do the trick?

But banks would be skating on thin ice, with wafer-thin margins that additionally depend on the price of the yellow metal in the interregnum between deposit and redemption when banks get freedom to play around with depositors' gold.

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