Domestic gold spot exchanges face tax hurdle, unlikely to start ops

IBJA has also suggested to the govt to create a notional entity wherein all GST is immediately refunded by the govt to the trader as soon as gold is deposited in the vault

Domestic gold spot exchanges are facing taxation hurdles, and until the issues are sorted out, they are unlikely to start operations. 

All three domestic exchanges had initiated the process to start spot gold trading either as a segment on the existing exchange or as a separate platform.

The National Stock Exchange (NSE), the country’s largest exchange for equity spot and derivatives, has announced a tie-up with the Indian Bullion and Jewellers Association (IBJA). Members of the IBJA will pick up equity in the proposed firm and all the process for that is understood to be in the last leg.

The BSE, India’s oldest exchange and leader in mutual fund (MF) investment, has decided to launch a spot gold segment on its existing platform. The Securities and Exchange Board of India (Sebi) has notified all norms and regulations for gold spot exch­anges. But there is the crucial issue of goods and services tax (GST), and that needs to be resolved before trading begins.

The process is that one who wants to sell gold on the spot exchange will have to first deposit the gold in an exchange-approved vault for conversion into electronic gold receipts (EGRs). Whether the trader deposits imported refined gold or domestically refined gold, he/she would have already paid 3 per cent GST on it. GST is paid on imports of refined gold as well as unrefined gold (dore).

EGRs will trade on domestic exchanges without GST because they are a security instrument. This EGR may change multiple hands before someone opts to rematerialise it by taking physical delivery of gold. However, the initial depositor of gold will not get GST refunds until EGR is rematerialised for physical gold. This locks the initial depositor’s liquidity and 3 per cent is big money for a commodity like gold.

“The BSE has received in-principle approval from Sebi to launch it (spot gold trading) as a segment and is waiting for more clarity on taxation issues before the formal launch, although mock trading has begun,” said Sameer Patil, chief business officer, BSE.

The IBJA, the apex jewellery industry body and partner for the NSE’s gold exchange, has suggested to the government to create a notional entity wherein all GST is immediately refunded by the government to the trader as soon as gold is deposited in the vault. This notional entity can also collect GST when the rematerialisation of EGR is done into physical gold. This system already exists in China.

Giving GST refunds to a bullion dealer who deposits gold in the vault is akin to the already prevalent system of giving refunds to a deemed exporter. This system does not result in any revenue loss to the government but will also ensure that the Gold Monetisation Scheme (GMS) becomes successful. Needless to say that there is 25,000 tonnes of gold in India and that can be brought to the proposed domestic exchanges.

Another issue is of gold import through the duty-concessional FTA route. These can also distort the market and prove to be an obstacle to price discovery at the exchanges. Gold imported at concessional duty typically trades at a discount in physical markets and, as a result, will be cheaper than exchange-traded gold.

Surendra Mehta, national secretary, IBJA, said: “Domestic gold spot exchanges will bring in transparency in the gold ecosystem. It is essential all gold bars brought into the country are routed, purchased and, sold through domestic gold spot exchanges. This will also bring in price discovery.”