Bullion should be treated as currency and taxed accordingly

Bhargava Vaidya is a Chartered Accountant by profession. He was on the board of a leading jewellery company. He was on the FIEO committee that opened up gold and then silver imports under the Special Import Licence scheme in the mid-1990s. He has been a speaker at most seminars on precious metals, both in India as well as overseas.

Since 2000, he is one of the few analysts who is invited to the global survey conducted by the LBMA for forecasting the price of gold and silver every January. He is on the board of IBJA and has also served on the FICCI and other trade organisations pertaining to gold and silver.

He has also acted as an advisor to commodity exchanges. Vaidya explained the nitty-griity of gold trade in an e-mail interview with Free Press Journal’s columnist Sanjiv Arole. Edited excerpts:

You have been taking part in the Annual LBMA forecasting exercise every year in January. This year too you had predicted the gold price and range for the year. What was it and if you re allowed to revise your prediction again in view of the high gold price, what would that be? Any specific reasons?

My forecast at the beginning of the year for gold was off target. For the remainder of the year, I would forecast a range from $1,475 to $1550 per ounce for gold. Several reasons contributed to the recent surge in gold price in the last few months.

Some of which are: (a) there is an imbalance between fiscal and monetary policies all over, both in the developed world (US, Europe and Japan) and the developing world as well. The real interest problem is magnified as it is festering since early last century.

Then, the tariff wars taking place between several groups of countries make things very murky. Nobody really knows how things could pan out. It is here that people go to gold because it is the best form of insurance that is both mobile and easy to convert. (b) The US is expected to slow down further, around 2%, Europe at 1.1% and the developing world at nearly 4% plus.

Therefore, a global slowdown in the economic activity led a surge in gold prices. (c) Central banks purchased 651 tonnes in 2018, up by 74% from the previous year.

These are the highest purchases of gold made by central banks since the 1970s. The same trend has continued during 2019. (d) The dovish posture of the US Fed on rate cuts has propelled gold forward during the recent gold rally.

Interest rate cuts and QEs could further spur the gold price. Likewise, the ECB announced rate cuts and stimulus to boost the markets. The fact that the ECB just announced the intention to restart the stimulus process from September caused gold price to move forward. (e) The fact that the US is into a trade war with China and engaged in tariff disputes and sanctions against many more countries adds to the imbalances in the system and propels the gold price forward. (f) Geo political tensions in various regions of the world, particularly around Iran acts is combustible for gold prices.

Any news about confrontation in the Strait of Hormuz adds to the tensions and one can see the gold price zoom forward. Therefore, seizure of ships by either parties or downing of drones could easily escalate the stand-off between the US and Iran.

The change in Syria leading to escalation in violence aided the gold price. Moreover, posturing by global leaders on various issues acts as a catalyst to the gold price.

What is your reading of the gold market in India today?

A few factors impacted the gold markets. This year, supply of scrap was very high. Probably, floods and other natural calamities contributed to the inflow of scrap. Moreover, the high gold price in rupee terms in the third quarter of the year (July-September) acted as a major boost to the scrap supply.

Further, the slowdown in the Indian economy has affected demand for gold and thereby lowering of imports during the same period. However, the volatility and decline in the stock markets after the Union Budget in July and the unearthing of fresh scam in the Co-operative banking sector as well as slowdown in the real estate sector has seen a re-affirmed faith in the yellow metal as a safe haven.

What are the biggest challenges facing the gold market these days?

The challenges faced by the gold industry are nothing new. Most of them like gold markets at a discount to landed cost of gold, issues of quality of gold bars, purity of the metal, an increase in working capital requirements since the advent of GST, etc crop up from time to time. However, there are some issues that have to be addressed urgently.

(a) Compliance on all fronts. The trade seems lethargic in compliance of hallmarking, in the sense that the process is very slow and despite over 800 hallmarking centres, there are still issues on poor quality of jewellery sold at times in spite of it being hallmarked.

Compliance on the GST front is an ongoing process and it will be a while before it becomes seamless. There are still many cash transactions taking place by often splitting a bill. The new Money Laundering Law set up to international standards is not understood clearly by many and it is being implemented half heartedly.

The impression is that some in the trade try out various ways and means to circumvent the whole process. On the demand front, the trade seems worried at the behaviour of the `Millennials’ towards gold. It seems that they are more interested in white goods, holidays, clothes, watches, etc. than in gold.

The high gold price coupled with 12.5% import duty and GST of 3% brings in the issue of working capital getting blocked. Is there any way out of this state of affairs?

It is true that the current high price of gold coupled with import duty and GST will require higher working capital requirement getting blocked. This is more so for new entrants and those with expansion plans. We may see a decline in such expansions, etc.

Moreover, margins will be under stress as the demand is poor since the time the gold price shot up in the second half of the year. Although, demand could return once the price stabilises, this is a perennial problem now. However, no relief can be expected from any quarter as gold is low on the priority list of lawmakers.

The high import tariff also brings unofficial trading in gold back into focus. Is there any middle ground between CAD concerns of the government on one side and the fact that smuggling is very much on the upswing? Is there any way out?

While it is a given that smuggling and higher import duty are correlated, I am not sure of the smuggling numbers. I am of the opinion that bullion per se should be treated as currency and taxed accordingly, then, the issue of smuggling would not really arise.

On the issue of jewellery, if you treat it as luxury, then the present taxation rate is what the government will levy. On the issue of a middle ground between CAD issues and smuggling of gold, I am sure that people who understand the economy more than me are working on it.

Do you feel the industry speaks in many voices and, in spite of the newly formed Gold & Jewellery Domestic Council of India initiated by the then Commerce Minister in January 2019, there is a need for the industry to tackle various issues presenting a united front?

(Laughs aloud). I hope the industry can speak in one voice or present a united front. However, what is more important is that the industry takes up relevant issues to be brought out before the authorities. A majority or one voice need not be right always. After all, when Galileo said that the world was round, he was alone. Moreover, he was arrested for it!

The Gems & Jewellery trade has serious issues of trust with both the government and the consumers they cater to. There is a trust deficit that needs to be addressed urgently. Is the trade doing much on this issue? What needs to be done to improve the gold trade’s image?

At the present juncture, the trust deficit issue will be difficult to address it to the government. The industry needs to do a lot more to convince the authorities on this issue.

As far as the customers/consumers are concerned, I think the industry is on the right path (hallmarking, price transparency, billing, etc.) and could achieve the desired results. However, the path is long and an arduous one.

In the current scenario, what needs to be done to push reforms forward?

There is crying need for clarity in legislation. The various ministries need to be on the same page. Too often we see the commerce ministry at loggerheads with the finance ministry.

A major push in the reform process is `Paper gold’ for transparency, quality and to have an audit trail. But, the promotion of Paper gold leaves a lot to be desired. It is just another tool in the hands of stock market brokers.

Then, the Gold Monetisation Scheme has to be re-formulated in such a way that all stakeholders are at first interested and then they all benefit from the scheme. Currently, it appears that the GMS is left to fend for itself on its own.

No one wants to own it. There has to be an interface between the consumer/customer and the government that has set the GMS into motion. I cannot believe that people do not want to part with their gold. That is a myth.

Any suggestions to improve the GBS & GMS? Or do these schemes require a total overhaul?

The Sovereign Gold Bond could be issued as a certificate through a larger network. Moreover, it should be a continues process (on tap) with dynamic pricing and a vibrant secondary market.

As mentioned earlier, GMS needs to be attractive to all stakeholders. In fact, both the schemes have to be marketed better. They cannot flourish in isolation.

Is DigiGold the future in gold investments?

A little bit of tweaking in legislation could make this segment as the fastest growing product.

Is the rural investor of gold getting sidelined in the new scheme of things?

I agree schemes are not made to carry them along.