The best part of the Modi government’s new gold policy is there will be tax relief on capital gains if you invest in the proposed bond scheme for the yellow metal.
Finance Minister Arun Jaitley, who had initiated the new policy in his budget speech in February 28, is in the process of giving final touches to what could well turn out be a game-changer for the government in terms of tackling the country’s massive current account deficit. But it may be another two months before the notification for the schemes is made.
“The department of revenue has said that they will consider indexation benefit if bond is transferred before maturity and complete capital gains tax exemption at the time of redemption,” Economic Affairs Secretary Shaktikanta Das said last week at a press conference chaired by Jaitley.
Indexation benefit refers to paying tax only on real gains after adjusting for inflation. India began indexing inflation from April 1, 1981 when it was fixed at 100. For the year 2015-16, the cost inflation index has been notified at 1081. What this means is if you had bought something worth Rs100 in 1981, you will have to spend Rs1,081 for the same thing in the current financial year.
So gains from gold bonds over three years would also be eligible for such indexed calculation and long-term capital gains tax at the rate of 20% will be levied only on receipts higher than the indexed value. This is if you surrender the bond before its maturity, which could be either five or seven years, but not before three years are completed. Surrendering the bonds before three years will invite full capital gains tax at the rate of 30% and there will not be the benefit of indexation either. If you were to stay invested in these bonds till maturity the government proposes to absolve you of any tax liability arising out of such gains.
The government’s move to encourage Indians to go in for this “paper gold” instead of the “real stuff” could well be a win-win proposition for the country as a whole. While the smart investor can gain when she decides to surrender/trade these bonds and also enjoy tax relief, the government will be saving valuable foreign exchange by avoiding importing the precious metal. India is by far the world’s largest importer of gold averaging close to 1,000 tonnes a year. An estimated 20,000 tonnes of the metal is being held by private individuals. In comparison, Fort Knox, the US official depository for gold, reportedly has just over 8,000 tonnes.
Non-resident Indians will not be allowed to invest in these government-guaranteed bonds, but that should not dampen their spirits as there is no curb on their relatives back home in India investing on their behalf although there is a cap of 500g per person per year.
Jaitley also announced a gold monetisation scheme that is expected to reduce the quantum of gold bought as pure investment. This is in the region of 300 tonnes in gold bars and coins every year and it is the government’s hope that at least some portion of it will shift to gold bonds. This is mostly aimed at temple trusts rather than individuals who may not like the idea of parting with the family bauble. However, trusts like those of the Padmanabha Swami temple in Thiruvananthapuram, the Sri Krishna temple in Guruvayoor (both in Kerala) and the Tirupathi temple in Andhra Pradesh reportedly have thousands of tonnes of gold in their custody. The new scheme could come in handy for both the government, which will save on import costs, and the trusts which now spend millions of rupees just to safeguard this wealth.
Although Prime Minister Modi has been gung-ho about how he would turn India into an economic superpower, his finance minister is more amenable to err on the side of caution. From the day he took charge, Jaitley had said he would want to go for the “low-hanging fruit” first rather than cut-and-thrust legislation on issues that needed wider debate. The one attempt made in the amendment to the land acquisition bill came a cropper and so Jaitley can be expected to be doubly cautious from here on.
Caution also seems to have been the guiding principle in the gold scheme too as Jaitley has yet to decide on the most crucial aspect of the entire programme - the rate of interest that depositors/buyers of bonds would be offered. Bullion traders feel if the rates are anything lower than normal savings bank rates of 3% (some banks offer as much as 6%, but they are exceptions) the scheme would turn out to be a dud.
Reserve Bank of India chief Raghuram Rajan, who is likely to announce a cut in lending rates on September 29, will also have a major say in the matter. But the big debate is how the taxman will view the declaration of this till-now unaccounted wealth. Tax sweeteners and sops apart, will the taxman get after those who opt for these schemes asking for the source of the gold? The government finds itself in a bit of a bind here because it cannot declare amnesty to those who come out in the open with their gold holdings. This is because way back in 1993 the government had declared an amnesty for gold and had succeeded in attracting large deposits. But in 1997 the government had given a commitment to the Supreme Court against any similar amnesty in future.
Jaitley is pursuing unaccounted wealth stashed away by Indians in foreign tax havens and names of such individuals and entities are slowly coming out. There is indeed some concern whether the government would let the taxman loose on those who deposit gold beyond a certain weight.

Nation loses as politicians bicker

Modi has given up hope on getting the GST bill passed in the winter session of parliament. Industrialist Rahul Bajaj is of the view that the GST is not that big a deal and if it does not get parliamentary approval so be it.
But many noted economists agree that a uniform tax structure for goods and services would boost India’s GDP by a whopping 2% and that is no small figure. The failure of the government in getting the Congress Party on board on the GST is the second major blow to Modi who lost out to the opposition on the amendments to the land acquisition bill which has now lapsed.
But Modi is said to be keen on implementing the provisions of the proposed amended bill through a different route - that of states. The prime minister, it is said, has sent out feelers to chief ministers that they could go ahead and amend their respective land acquisitions bills so as to make it easy for industries and infrastructure projects to go on stream without too much hassle on the land front.
Many BJP-ruled states are said to be in favour of this but the few states where the Congress is still in power find it difficult to go over the head of the high command and implement a legislation that has been opposed tooth and nail by the Gandhi family.
The GST, though, has no such luck because this has got to be a collective, and therefore, central decision. September 20 is the last date for the GST administrative mechanism to be put in place but there is little chance of that happening although privately many senior Congress leaders are in favour of the bill. They are of the view that since the BJP has accepted the Congress Party’s demand to drop the land bill, the party should show the give-and-take spirit with regard to GST. Seasoned Congressmen feel that an anti-GST stance could paint the party as anti-development and in today’s India that will certainly not look good.
But the visceral dislike that the Gandhis and Modi have for each other is scuttling any rapprochement. Reports have emerged that Ghulam Nabi Azad and Anand Sharma had suggested a meeting between Arun Jaitley and Sonia Gandhi to thrash out the differences. But even if Sonia Gandhi could relent, Rahul Gandhi is said to be so annoyed with Modi that he would not let his mother talk to anyone in the BJP. Unfortunately the nation is the loser. But then who cares?
(This column will reappear on September 30)