Domestic gold spot exchanges are facing taxation hurdles and until such 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 platform, or as a separate platform.
NSE, the country’s largest exchange for equity, spot and derivatives, has announced A tie up with Indian Bullion and Jewellers Association (IBJA). Members of IBJA will pick up equity in the proposed company and all the process for that is understood to be in the last leg. BSE, India’s oldest exchange and leader in mutual fund (MF) investments, has decided to launch the spot gold segment on its existing platform.
Sebi has also notified all norms and regulations for gold spot exchange. But, there is the crucial GST issue, and that needs to be resolved before spot gold exchange trading begins.
The process is that anyone wanting to sell gold on the spot exchange will have to first deposit the gold in an exchange approved vault for conversion into electronic gold receipt. Whether the trader deposits imported refined gold or domestically refined gold, he/she would have already paid 3 per cent GST on the same. GST is paid on import of refined gold as well as unrefined gold (dore).
The electronic gold receipt (EGR) will be traded on domestic exchange without GST, as the same is a security instrument. This EGR may change multiple hands before someone opts to rematerialise the same by taking physical delivery of gold.
However, the initial depositor of gold will not get GST refund till the 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.
“BSE has already received in principle approval from Sebi to launch it (spot gold trading) as a segment and waiting for more clarity of taxation issues before formal launch, although mock trading has already begun,” said Sameer Patil, chief business officer, BSE.
IBJA, the apex jewellery industry body and partner for NSE’s gold exchange, has also 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 rematerialisation of EGR is done into physical gold. This system already exists in China.
Giving a GST refund to a bullion dealer who deposits gold in the vault is akin to the already prevalent system of giving refund to a deemed exporter.
This system does not result in any revenue loss to the government but will also ensure that the Gold Monetization Scheme (GMS) becomes successful. Needless to say that there is 25,000 tonnes of gold in India that can be brought to the proposed domestic exchanges.
Another issue is of gold import through duty concessional Free Trade Agreement (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 exchange shall bring complete transparency of the entire gold ecosystem of the country. To make the gold ecosystem transparent, it is essential all gold bars brought into the country are routed, purchased and sold through domestic gold spot exchange. This will also bring price discovery. We are hopeful that the GST amendment as suggested by us and prevailing in other countries like China will be implemented for the success of the exchange.”
IBJA has said that the gold brought into India through routes other than domestic spot exchange will bring down volume on the exchange and hence price discovery.