Exchange traded investment grade gold should be exempt from indirect taxes: IIM-A

Calling for a spot gold exchange in India for efficient price discovery of the precious metal, a report by the Indian Gold Policy Centre (IGPC) at the Indian Institute of Management, Ahmedabad (IIM-A) suggests exempting investment grade gold traded on such an exchange from indirect taxes like VAT and GST.

"As in other Asian countries like China and Singapore, investment grade gold traded on the exchange should be exempted from indirect taxes like VAT and GST, but should be subject to Commodity Transaction Tax (CTT). This proposal to levy CTT in lieu of VAT or GST is likely to be broadly revenue neutral (if not revenue accretive) for the government," the IGPC report states.

The report suggested that as gold does not have a standard price in India, a national-level spot exchange would benefit all stake-holders by ensuring transparency in pricing and standardization. It would also help India evolve as a gold trading hub.

To understand the gold market in India and the scope for a gold exchange, IGPC conducted a field survey with leading jewellers, refiners, bankers, commodity exchanges and other participants in the gold value chain to discuss the need for and the design of a spot gold exchange.

"A spot gold exchange in India is eminently viable and would help create a vibrant gold ecosystem in India. It would lead to efficient price discovery, assurance in the quality of gold, active retail participation, greater integration with financial markets, and greater gold recycling. The gold exchange would also help in the gold monetization efforts of the government," the report stated.

As per the report, the exchange must be promoted by neutral players who do not suffer from conflicts of interest and must be regulated by Sebi, the market regulator in India. It must also seek global partnerships and collaborations to increase its global reach.

"Viewpoints from various participants was sought and noted by government officials of concerned ministry. Officials announced a discussion with Sebi in the coming days on legal aspects of the proposed spot gold exchange as there were no Sebi representatives present at the meeting," said IGPC.

While the initial aim of this study was focused on price, many other interesting aspects of gold emerged, which are important for the Indian gold market and strategizing sales. The qualitative analysis brought out multiple important aspects of gold. It turned out to be a social asset, which resonated with almost all of our participants.

Participants also discussed about the hedonic value associated with such an asset and the norms of passing it on in the family. On a socio-cultural side, gold was a gift almost mandated for socially close ceremonies, especially weddings; as it was quite clear that gold was a more valuable asset to be gifted.

The concluding report of IGPC said: "We tried to dig up reasons why gold was seen as a good investment. Beyond being an investment, there were also hedonic and normative roots associated with gold which did not allow it to be normally traded as other commodities."