The government’s gold monetisation scheme (GMS) was launched in 2015 with the aim of turning this unused gold lying idle in India’s households into a productive asset. The scheme was also to help reduce India’s dependence on gold imports. Here’s a quick rundown on what’s now brewing:
What’s the issue?
Gold imports have plunged to $79.14 million during the first two months of 2020-21 on a major fall in demand amid the Covid pandemic, according to data from the commerce ministry. With domestic bullion prices hitting a record high, India’s gold demand in 2020 is expected to fall to the lowest level in 26 years, according to the World Gold Council.
What’s the news?
Amid the crash in gold imports, the government has approached jewellers and bullion dealers on how to tap India’s idle gold. The industry proposes aligning the income tax law with gold deposit schemes, raising gold holding limits under ‘Streedhan’, tweaking the GMS to make it more attractive, and giving greater flexibility to local refineries to scale up as part of a broader gold policy.
How can GMS help?
The main aim for GMS was not only to make existing schemes more effective, but broaden the scope for mobilising gold held by households and putting them into productive use. But the existing GMS is yet to take off, only garnering deposits of 20 tonnes of gold till now.
“Families accumulate gold over the years, and even if it’s purchased with legitimate earnings, there may not be adequate documentation to back this. So, many are reluctant to participate in the revamped gold deposit scheme due to fears that they may be questioned by tax officials later,” said a jeweller.
What GMS offers you
Investors can make term deposits of their idle gold under GMS, which provides them safety and interest earnings. With gold deposited in GMS, investors save the storage cost for keeping their precious metal safe, while still benefiting from its capital appreciation. Gold can be deposited in any form — gold bars, coins or jewellery, and the depositor also has the option to either take cash or gold on redemption.
Another lucrative benefit comes with interest earned on the gold deposited by investors being exempt from tax. In the case of medium and long-term deposits, investors can earn up to 2.25 per cent per annum.
Why GMS may be a win-win
Investors in physical gold face a key challenge with safe storage spaces. While gold’s value surely grows, keeping it around doesn’t come cheap. It is common for gold owners to deposit bullion in bank lockers, which is an additional cost and comes with no insurance for the contents. A safer option offers storing gold with the GMS, which promises returns on the deposit.
How will GMS 2.0 work?
Gem & Jewellery Export Promotion Council (GJEPC) has proposed to link GMS with the Income Tax Act which states that gold jewellery to the extent of 500 grams per married women, 250 grams per unmarried women and 100 grams per male member of a family need not be seized. According to a 2016 directive, such seizure would not be carried out “even if prima facie, it does not seem to be matching with the income record of the assessee”.
The industry also feels that these limits which were fixed in 1994 should be revised to 1 kg, 500 grams and 200 grams, respectively.
The existing gold deposit scheme allows a customer to deposit idle gold to earn interest but it lacks flexibility. According to an industry source, the deposit certificates under GMS should be made tradable, as is not the case now, in demat form with certain tracking mechanism — something that would give the certificates the feature of liquid instruments.
Another suggestion involves reducing the minimum deposit requirement to 10 grams instead of the current 30 grams.
Besides, instead of a plain amnesty window, the industry is now asking for a more effective scheme within the contours of regulations on gold import, declaration and taxability of income and wealth and prevention of money laundering.
Incentivise gold accounts
Following the dramatic fall in imports of bullion and dore bar (a semi-pure alloy), gold refiners are meeting the current physical demand by recycling jewellery scrap. If the GMS is incentivised for banks by allowing them to open gold metal accounts for customers, that can go a long way in helping use old gold from domestic holdings to meet the country’s requirement of new gold, said James Jose, MD of CGR Metalloys.
MCX is also putting in place a plan to enable locally refined gold to be delivered via its futures and options contracts.
Encourage refinery projects
Of the total gold imports, close to 40 per cent is dore imports by refiners while the rest is finished gold by banks. Of the 29 refineries, 15 have dore import licenses. In the past, industry had proposed encouraging large greenfield refinery projects like UAE and China to allow export of refined gold from India.
“First, banks should be permitted to buy ‘Indian good delivery’ bullion from BIS licensed gold refiners instead of buying from refineries abroad. In that case, customers and jewellers can sell more of their old gold to local refiners for conversion to bullion,” said Jose who is also the secretary of the Association of Gold Refineries and Mints.
Higher interest rates
Besides the reluctance of Indian households to part with family jewellery, another reason for the gold deposit scheme to languish is 7-14% loss of principal amount (and the interest) on account of making charge and process loss. “An improved GMS should consider a way to compensate for this, may be through higher interest rate,” said a member belonging to Indian Bullion & Jewellers Association.