Gold deposit scheme -- Reducing dependence on imported bullion

BAKUL K DESAI

Wearing gold jewellry on occasions such as marriage, party, etc, has reduced due to attendant risks. Gold jewellry lying idle with people and charitable and religious trust does not earn any income to them. Rather, they spend onrent for locker with a bank or keep with them, but with other risks, such astheft, loot, etc.

On the other hand, the government spends every year, valuable foreignexchange worth thousands of crores of rupees for importing gold, leading toincreased trade deficit and a weaker rupee. Accounting to an estimate,despite a stock of 13,000 tonne of gold approximately worth Rs 5,46,000crore in the country, every year, the government imports approximately 800tonnes of gold, worth Rs 33,600 crore approximately.

Finance minister Yashwant Sinha, in his second budget, has announced a golddeposit scheme, in order to reduce dependence on imported gold and tradedeficit and expects to save foreign exchange worth Rs 5,000 croreapproximately, by mobilising such idle gold. This will also help people savecosts otherwise incurred by them to ensure its security. Earlier also, thegovernment had announced such schemes, viz, 6.5 per cent gold bonds, 1977,seven per cent gold bonds, 1980 and national defence gold bonds, 1980.According to the proposed gold deposit scheme, 1999, eight nominated banks,viz, State Bank of India, Bank of India, Corporate Bank, Indian OverseasBank, Allahabad Bank, Canara Bank, Bank of Nova Scotia and StandardChartered Bank, have been permitted to accept gold deposits and issueinterest-bearing certificates or bonds, which on maturity can be exchangedfor gold or cash.

The main features of the gold deposit scheme are as under:

Interest will accrue at the rate of 3.5 per cent per annum and it willbe fully exempt from income-tax under Section 10(15) (vi) of the Income-TaxAct, 1961, from assessment year 2000-01.

Capital gain on sale or redemption of the Gold Deposit Bonds will befully exempt from income-tax, from assessment year 2000-01 as Gold DepositBonds are proposed to be excluded from the definition of "capital asset'given in Section 2 of the act. Capital gain liable to tax is computed withreference to the market value of the gold received on redemption of GoldDeposit Bonds and its indexed cost of acquisition.

Value of the Gold Deposit Bonds will be exempt from wealth-tax as theExplanation 2 proposed to be inserted in clause (ea) of Section 2 of theWealth-Tax Act, 1957, seeks to exclude Gold Deposit Bonds from `jewellry,and consequently from `assets' from assessment year 2000-01.

Movement or transfer of Gold Deposit Bonds may be exempt from octroi,sales-tax, stamp duty, and similar levies as and when all the stategovernments amend the relevant laws.

The gold deposit scheme will not enjoy any amnesty, implying that ifrequired, the source of the gold deposited will have to be explained to theincome-tax department.

While there appear to be advantages referred to above, there may be a fewdisadvantages in the form of other costs, such as the following:

When one deposits his gold jewellry, the Gold Deposit Bonds will beissued only in respect of the gold content of specified carats. Generally,as per the practice prevalent in the bullion market value of the goldjewellry which are made of 22 carats may be generally lower by around 12 percent as compared to the value of the gold content of 24 carats, as explainedin the table.

When one receives the same quantity of gold of the same carats asdeposited by him on redemption of the Gold Deposit Bonds on maturity, hewill have to incur again making charges of two per cent to 10 per cent ofthe value of the gold.

Octroi, sales tax, stamp duty, and similar levies may be payable, ifthe relevant laws are not amended by state governments.

There may be many issues concerning taxation, which may arise in respect ofthe gold deposit scheme. Although, all the details of the gold depositscheme are yet to be received, based on the details available, I haveattempted to analyse it and find an answer to such doubts.

Whether the capital gains on depositing gold jewellry or gold in bank inexchange for Gold Deposit Bonds will be taxable?

The gold jewellry is not treated as `personal effect' and hence, notexcluded from the definition of `capital asset' given in Section 2(14) ofthe act. Also, as held by the Calcutta High Court in the case of CIT vsDebmalya Sur 207 ITR 996 (Cal) the gold and gold bonds are not identicalassets but two distinct assets within the definition of `capital asset'.Therefore, it is very clear that when a person exchanges gold for the goldbond, he acquires an altogether new species of capital asset. Hence, theproposal to exempt capital gain on the sale/transfer of Gold Deposit Bonds,cannot be extended to gold jewellry or to gold.

In circular No 415 dated March 14, 1985 (152 ITR (St) 205) the CBDT hastaken a view that the exchange of gold bonds at the time of redemption is analtogether fresh transaction when an assessee acquires a different asset.i.e. the transaction of depositing gold in exchange for gold bonds an thetransaction of receiving gold in exchange for gold bonds at the time ofredemption are altogether different transactions.

Therefore, the capital gains on depositing gold jewellry in bank in exchangefor Gold Deposit Bonds will be liable to income tax at the rate of 20 percent. During the last 19 years, the price of standard gold of 24 carats hasvaried.

It will be observed that the indexed cost of acquisition as on March 31,1999 of gold acquired on any of the year-end from March 31, 1982 to June 11,1999, ranges from Rs 4,464 (as on March 31, 1999) to Rs 8,058 (as on March31, 1992) and except for gold acquired on March 31, 1999, the indexed costof acquisition as on March 31, 1999 was never less than Rs 4,464. Therefore,considering the price of gold as on June 11, 1999, at Rs 4,060, there willbe no taxable capital gain on transfer of gold or gold jewellry, if it wasacquired on any of the year-end from March 31, 1982 to March 31, 1999.Obviously, in the current depressed scenario of the gold market the worldover, one cannot expect to make any capital gain, in fiscal year 1999-2000.Hence, though the capital gain on depositing gold jewellry or gold in bankin exchange for Gold Deposit Bonds, will be liable to tax, in reality therewill not be any taxable capital gain. Therefore, a specific provisionexempting from tax, capital gain on depositing gold jewellry or gold in bankin exchange for Gold Deposit Bonds is not warranted.

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