Domestic gold exchanges face a tax hurdle, and are unlikely to start operations



Local gold exchanges face tax hurdles and until these issues are resolved they are unlikely to start operations.


All three local exchanges have started the process of starting spot gold trading either as a piece on the existing exchange platform, or as a separate platform.

NSE, the country’s largest stock, markets and derivatives exchange, has announced a partnership with the Indian Bullion and Jewelery Association (IBJA). IBJA members will acquire equity in the proposed company and it is understood that all operations for this will be in the last stage. BSE, India’s oldest exchange and leader in mutual fund (MF) investments, has decided to launch the spot gold segment on its existing platform.


Also notify Sebi of all the rules and regulations for spot gold exchange. But, there is the crucial GST problem, which must be resolved before spot gold trading begins.


The process is that anyone wishing to sell gold on the spot exchange will first have to deposit the gold in an authorized vault at the exchange to convert it into an electronic gold receipt. Whether the trader deposits imported refined gold or domestically refined gold, he will have already paid 3 percent GST on the same value. GST is paid on the import of refined gold as well as unrefined (cyclic) gold.


The Electronic Gold Receipt (EGR) will be traded on the local exchange without GST, as this is a safety tool. This EGR may change before someone chooses to reincarnate by taking the physical delivery of gold.


However, the initial depositor of gold will not receive a GST refund until the EGR for physical gold is reprocessed. This closes out the initial depositor’s liquidity and 3 percent is big money for a commodity like gold.


“BSE has already received initial approval from Sebi to launch (spot gold trading) as a division and is awaiting more clarity on tax issues before the official launch, even though mock trading has already begun,” said Sameer Patel, chief business officer of BSE. .


The IBJA, the main jewelry industry body and partner of the NSE Gold Exchange, has proposed to the government to create a theoretical entity where all GST is immediately refunded by the government to the merchant once the gold is deposited in the vault. This theoretical entity can also collect GST when the EGR is converted into physical gold. This system already exists in China.


A GST refund to a bullion dealer who deposits gold in a vault is similar to the already prevalent system of refunding money to an assumed source.


This system does not result in any loss of revenue for the government but will also ensure the success of the Gold Monetization Program (GMS). It goes without saying that there are 25,000 tons of gold in India that can be brought to the proposed local exchanges.


Another issue is related to the import of gold through the Facilitated Free Trade Agreement (FTA). This can also distort the market and prove to be an obstacle to price discovery on the exchanges.


The gold that is imported at concessional fees is usually traded at a discount in the physical markets and as a result, it will be cheaper than gold that is traded on the exchange.


Surendra Mehta, National Secretary, IBJA said, “The local gold exchange must bring complete transparency to the entire gold ecosystem in the country. To make the gold ecosystem transparent, it is essential that all gold bars brought into the country are routed, bought and sold through the gold exchange. This will also lead to price discovery. We hope that the GST adjustment as we have proposed will be implemented and prevailing in other countries such as China for the success of the exchange.”


The IBJA said that gold brought into India through methods other than the local spot exchange would reduce the size of the exchange and thus price discovery.

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