The Finance Minister in his Budget speech in February, 2015 announced proposals to monetise gold i.e., converting the country’s gold holding into loanable assets to spur spending and investment, and limit the need to import gold. The stock of gold in India that is held by households and institutions namely, temples and other religious places, charitable trusts etc is virtually a dead investment that is neither monetised nor traded. India’s gold holdings are estimated to be over 20,000 tons worth about Rs. 60 lakh crore at the current market price. About 800-1,000 tons of gold imported every year increases the nation’s stock of this precious commodity.

The Government has since issued a draft Gold Monetisation Scheme (GMS in short) inviting suggestions from the stakeholders. Its objectives are as follows:-

1. To mobilise the gold held by households and institutions in the country.

2. To provide a fillip to the economy’s gems and jewellery sector by making gold available as raw material on loan from the banks.

3. To be able to reduce reliance on import of gold over time to meet the domestic demand since we produce gold within the country.

Working of the Scheme

The Scheme involves the purity verification of the gold, its conversion into gold bars of 24 ct purity: its deposit for credit in the Gold Savings Account with the bank of the depositor’s choice and lending of gold on interest and its utilisation for other purposes by the banks.

(i) Purity verification, conversion into pure gold and its deposit

Bureau of Indian Standards (BIS) has approved nearly 350 hallmarking Centres all over the country. They will act as purity test centres for GMS as they are well equipped to certify the purity of the gold jewellery in a short span of time. The purity test centres will inform the intending depositor, after a preliminary test, the approximate amount of pure gold in the gold ornaments that he proposes to be converted into gold bars for the purpose of deposit in the Gold Savings Account. If the depositor agrees, he will have to fill up a bank-KYC form and give his consent for melting the jewellery. If the depositor doesn’t agree to the melting, he can take back his jewellery. After receiving the customer’s consent for melting the jewellery, a further test of purity will be conducted called the Fire Assay Test. The customer can watch, from the viewing gallery, the entire process of melting and assaying the gold. The gold ornaments will then be cleaned for its dirt, studs, meena, etc. The studs etc. will be returned to the customer. The jewellery will be melted and its purity ascertained. If the customer is not satisfied with the results of the Fire Assay Test, he will have the choice of refusing to accept, in which case, he can take back the melted gold in the form of gold bars after paying a nominal fee to the Centre. Alternatively, he may agree to deposit the gold, in which case, the fee will be paid by the bank if the customer agrees to open a Gold Saving Account with it. He will be given a certificate from the Gold Collection Centre certifying the amount and purity of the gold deposited. The gold will be transferred toone or the other 32 gold refineries that exist in the country.

(ii) Opening of Gold Saving Account with the bank

On production of the certificate from collection centre, the bank will open a Gold Saving Account for the customer and credit the quantity of gold into that account. The customer will be paid interest on the deposit which will be decided by the bank. The tenure of gold deposit will be for a minimum period of one year with a roll out in multiples of one year. The customer will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself, i.e., at the time of deposit of gold and opening of the Gold Saving Account. The minimum quantity of gold that a customer can deposit is proposed to be only 30 grams- this is to encourage the small depositors to allow their gold ornaments to be used for productive purposes.

(iii) Utilization of the gold deposits with banks

As per the Scheme, the gold deposited with the banks can be utilized for any of the following purposes.

1. Cash Reserve Ratio (CRR)/Statutory Liquidity Ratio (SLR)
   
   
   To incentivise banks, it is proposed that they may be permitted to deposit the mobilised gold as part of their CRR or SLR requirements with the Reserve Bank of India.

2. Foreign Currency

   Banks may sell the gold to generate foreign currency. The foreign currency thus generated can be used for onward lending to importers.

3. Coins
   
   The bank may also convert mobilised gold into coins for onward sale to their customers

4. Gold Exchanges
   
   Banks may buy and sell gold on domestic commodity exchanges, where mobilised gold can be delivered.

5. Lending to jewellers
   
   
   The gold can also be used for lending to the jewellers. The procedure will be somewhat as follows:-

   1. Gold Loan Account: The jeweller, on the basis of the terms and conditions of the bank, may open a Gold Loan Account at the bank.

   2. Delivery of gold to the jeweller: When a gold loan is sanctioned, the jeweller will receive physical delivery of gold from the refiner. The bank will in turn make the requisite entry in the jeweller’s Gold Loan Account.

Challenges for the success of the Scheme

The success of the Scheme will largely depend on the response from the gold depositors who generally comprise households, institutions like trusts, temples and other religious places, and persons holding gold bars or coins by way of investment. The Indian households see the gold ornaments not as a mere investment but more as a status symbol. It is a well-known fact that in most of the Indian households, especially in southern States, gold ornaments are passed on from generation to generation as family; they are considered very sacred and have sentimental value. They become a part of the cultural heritage of the families. The villagers regard jewellery as their only means of savings. There is general aversion against parting with jewellery and getting it melted for earning a parting interest. They may not like to part with their ornaments. Selling or pledging of jewellery is perceived as a social ignominy.

As of now, investment in the Scheme will fetch higher price for every year for keeping gold in the Scheme. The interest will be in the form of gold and if the price of gold goes up, the interest will also go on. The Scheme will also be attractive to investors who invest gold in Exchange Traded Funds (ETFs). They can invest their holdings in gold ETFs and gold mutual funds to earn additional return. They can still hold the same amount of gold but can earn additional tax free return on their holdings per year. However, it is to be seen whether gold ETFs can be submitted to the bank under this scheme.

Exemption from income-tax, capital gains and the wealth tax

The Scheme proposes to provide exemption from income tax, capital gains tax and wealth tax. It is, however, not an amnesty scheme like the Voluntary Disclosure Scheme announced earlier. At the time of opening the Gold Saving Account, the bank may ask the depositor to meet its KYC (Know Your Customer) requirements, as per which, every depositor will have to furnish his photograph, proof of residential address, Permanent Account Number and identity proof. This is likely to discourage the depositors who have large amount of gold ornaments not disclosed to the Income-tax Department and have not disclosed them in their wealth-tax returns. In respect of households where gold is a family inherited property, it will be difficult to produce any documents to prove their ownership. There may also be a fear in the minds of depositors that the Income-tax Department may initiate enquiries and reopen assessments by issuing notices u/s. 147 of the Income-tax Act, 1961 and u/s. 17 of the Wealth-tax Act even though the Wealth-tax Act has been abolished by the Finance Act, 2015 from the A.Y. 2016-17. The depositors, may therefore, not only have to pay wealth tax and income tax, but may also be subjected to levy of interest and penalty. However, the Scheme may be attractive to investors who buy gold bullion for the purpose of investment. These investors can use the Scheme to earn some interest while protecting the increase in the future prices of gold.

Some suggestions

In order to make the Scheme attractive, the following are some of the suggestions for consideration:

1. Since, purchase vouchers are generally not preserved for the purchase of jewellery, no questions should be asked about its source, for the purposes of income tax or wealth tax from assessees who have not been subjected to wealth tax in the past at least, to the extent of one kg. of jewellery in the case of every married lady, one half kg. for every unmarried girl and one-fourth kg. per adult male.

2. Although the Wealth-tax Act has been abolished by the Finance Act, 2015 from the A.Y. 2016-17, no action should be taken for any of the earlier assessment years under the Act. This concession should form part of the Scheme and should therefore, be a judicially recognised commitment.

3. In order to make the Scheme more attractive, the rate of interest on gold deposit accounts should be higher at about 4% and should be the same as in the case of interest payable on Saving Bank Accounts. It should also be exempt from income tax irrespective of the size of the amount involved.

4. The depositor should be allowed to obtain loan against their deposits in case of need.

5. In order to encourage the senior citizens to offer the jewellery for gold deposit accounts, the interest should be payable monthly so that it becomes a source of their living. They should also be permitted freely to bequeath the gold lying in their gold deposit accounts to their legal heirs.

6. Lot of gold ornaments are lying in India belonging to the NRIs. They should also be permitted to open the gold deposit accounts and have the gold transferred to their country of residence in case they so desire.

7. The banks need not ask the depositor to meet KYC requirements in the case of agriculturists who have been enjoying income tax exempt income.

*Comments are welcome at:- [email protected]

S. R. Wadhwa
Advocate