DECEMBER 07, 2015

By Preety Parik, CA

"THAT which does not glitter is also gold" is not an illusion but a reality under the newly famous "Gold Monetisation scheme" of the Central Government.

The underlying objects behind the scheme are:-

(1) To convert the dead Asset "Gold" into income yielding asset owned by households and institutions.

(2) To bring idle gold investment into economy as trading asset and thereby reduce the imports of gold.

(3) Loans in form of Gold can be given to Jewellers.

Basic Facts:-

1) Almost 20,000 tons as on date is estimated to be held by individuals and institutions in safe vaults, which is totally non productive.

2) Much of Gold is purchased for investments.

3) Approx 900 Mt of gold is imported annually and around 40 billion$ payments are made on imports of Gold thereby accounting for 12% of total imports.

Metal Gold to Paper Gold- The process: -

1) Gold can be in any form- bars, coins or jewellery.

2) Holder of gold will have to carry purity test of gold at notified purity and collection centre. Minimum gold that can be tested is 30 grams. A preliminary machine test will show approx. amount of pure gold. If the customer agrees and further consent, melting of gold will be done in presence of the customer to know the exact amount of pure gold that will be free from dust, meena and studs.

3) If the customer agrees to the purity test result and is ready to deposit the gold, the customer can deposit the gold at the same purity and collection centre which shall give a certificate showing the quantity and purity of deposited gold.

4) Bank will open a "Gold Saving Account" on production of certificate of purity and collection centre. Bank will credit the account with the quantity of gold deposited. Purity and collection centre will also intimate the bank about the gold deposited by the customer.

5) Minimum tenure of deposit is one year with a roll out in multiples of one year. The Account will be credited with interest on yearly basis.

6) On maturity, the customer will get principal and interest, either in form of gold or money. The option has to be specified at the time of opening of account.

Shinning Rays in the Scheme:-

1) The Account shall be credited with interest. At present, notified interest rates are 2.25% pa for medium term deposits (5-7 years) and 2.5%pa for long term deposits (12-15 years). Thus if you deposit 50 grams of gold ( of worth of today's value) for 7 years, you earn 58 grams of gold (of worth of future value of seventh year)

2) Interest income has been notified as exempt from income tax.

3) The draft scheme proposes for capital gain tax exemption but the same has not been notified as yet.

Will the paper gold Shine?? Points to Ponder…

1) The success of the scheme primarily depends only on the will of individuals and institutions to deposit their gold holdings. Of Ages, Gold has been considered as status symbol. The estimated holdings of gold in families may be in form of ancient jewellery passed on from generation to generation. Culture and traditional sentiments are attached to individual holdings of Gold which may be hurdle to melt their metal gold to paper gold.

2) It will be political, social, religious task for Institutions like temples to overcome their myths and mythologies to the melt the gold offerings of the general public to the DEITY.

3) It is an open secret that Gold is an application of unaccounted income. Will it be really easy for the individuals and institutions to deposit their unaccounted investment in accounted banking channels and escape the tax regulator.Much of the holdings of individuals might not have been declared in the wealth tax returns. Is the Tax Regulator prepared to allow the depositors of gold without making roving enquiries about the source of investment through AIRs and ITRs?? Even for the investments out of declared source, Can the tax regulator promise to allow the depositors without disturbing their tax liabilities through reassessments and survey operations.

4) Till this date only 29 Purity Testing Centres and 4 Refineries have been notified which appears to be very small for melting 20,000 Tons. Many of the purity Testing centres are at Mumbai, Ahmedabad and other big cities, making itself very distant to depositors at mofussil and other rural areas. Today masses are addicted to e-banking and e-shopping, people may find difficult and tiresome to travel for long hours to check and test the purity of gold. A simplified procedure can still be worked out to bring this services at the door step of the depositor.

5) The existing scheme covers only the present holdings of Gold. What about the future investments in Gold??? Many of the investors, like me, prefer for yearly purchase of gold with a view for its requirement at years later on weddings or for any other reasons. It sounds absurd that customer purchases metal gold from local jeweler, then melts it at purity center and open paper gold account in the bank. An alternative can be provided in the scheme to open Gold Savings Account in bank by depositing cash equivalent to Gold's worth.

6) As a measure of security, the central government must undertake to provide security of investments and indemnify the depositors against the lossess, if any, that may occur, owing to any reasons, at banks, purity centres or refineries after the deposit of gold by the customer else the customer will prefer carrying the metal gold at its own risk rather than melting it to paper gold.

If only a small effort is made towards few Gold icons and idols like Bappi Lahiri, Radhe Maa, Pankaj Parakh, Datta Phuge, Tirumala Devasthan, Sri Lakshmi Narayani Golden Temple of Sripuram, Padmanabhaswamy temple, Shridi Sai Temple, to deposit their gold holdings, the paper gold scheme will truly shine and at least few thousand tons of metal gold will be soon converted into paper gold.