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Customs, DGFT & SEZ

All India Gems & Jewellery Trade Federation views & suggestions on "Draft Gold Monetization Scheme” announced by the Government of India - Suggestion to appoint one apex industry body having National presence to coordinate on the industry’s behalf.

June 26, 2015

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1.0 Background

The Gold Monetization Scheme (GMS or Scheme) is a welcome step initiated by the Government of India to unlock the unused and idle gold lying in households and institutions and bring them into mainstream and release the capital locked in for use in the economy for its development.

2.0 About All India Gems & Jewellery Trade Federation (GJF)

GJF is a national trade federation for the promotion and growth of trade in gems and Jewellery across India. It is a federation that has come together, for managing various aspects of fair trade practices and efficient organization of business in the gems and Jewellery industry. GJF represents over 300,000 players comprising manufacturers, wholesalers, retailers, distributors, laboratories, gemologists, designers and allied services in the domestic Jewellery industry. GJF has been instrumental in organizing the Gems and Jewellery domestic trade in a more structured manner and bringing about awareness among its members / players about the need to follow a more transparent, ethical and professional policies and procedures in its dealings with its customers and other stake holders in the industry.

3.0 Views & Suggestions of GJF

The entire draft of the GMS seems to have been designed on how operations of assaying and refining will take place largely disregarding the true goals and targets to be achieved and the manner to be proposed. It seems to be evolving around a singular premise of refining based on NABL standards which are held by a very few refiners in India and seems biased. There are no projections of how much gold will the proposed 300+ Hallmarking centers be able to garner. (Can we substantiate this claim?)

3.1 In the objectives of the Scheme (Serial no. 1), while there is a mention about “mobilize the gold held by households and institutions in the country”, the real impact and benefit of this measure in terms of providing a major boost to the Indian economy by release of the idle funds locked in these gold assets and its Gross Domestic Product (GDP) multiplier effect has not been highlighted. This is a very significant point given that even if we consider an annual release of 200/250 tons annually ie. 1% of Gold under this Scheme (as against an estimated Gold inventory of 24,000 tons held by various religious trusts, private individuals, other entities etc) there would be a direct release of over ₹ 50,000 Crores of liquidity into the economy, which even considering a conservative GDP multiplier of 3 could result in a major annual boast to the Indian economy and GDP by over ₹ 1.50 Lac Crores.

Further, with India presently importing over 850 – 950 tons, mobilization under this Scheme will also enable in bringing down gold imports significantly over a period of time, which will also provide a major relief to the Current Account Deficit being faced in the balance of payments in foreign exchange by the Country.

India holds an estimated 24000 tons or whereabouts of Gold, of which atleast 25 % to 35 % is estimated to be lying idle, held privately as well as through religious trusts etc. Almost 30 % of this gold i.e. 7200 tons is estimated to be lying as investment gold. With an attractive scheme and with full involvement of all stakeholders, there exists a potential to unlock atleast 1 % of the total gold (i.e. 240 tons) or 3 % of the investment idle gold (i.e. 216 tons) annually and release it back into the system.

Looking at the magnitude of the scheme as such it is imperative that all stakeholders in the Gems and Jewellery industry must be involved in the formulation and active implementation of the Scheme to ensure that the Scheme becomes a major success and ultimately benefiting the Indian economy.

The present draft of the Scheme does not bring out this objective and intent clearly and forcefully and as such unless this is redrafted and re-positioned in a proper manner, the Scheme’s objectives and ultimately the Scheme itself may get diluted.

3.2 In the Scheme document published, Serial No. II is missing (after Serial no. I, the Scheme directly moves to Serial No. III). It is not known whether some matter has been missed out in the document published or this is a mere typo error.

3.3 In the para “Scope” (Serial no. III), it is mentioned that “The Scheme requires a vast set up of infrastructure for facilitating easy and secure handling of gold. For this reason it may be possible to launch it initially only in selected cities. Over time, as the infrastructure for assaying and refining of gold develops, the Scheme can be extended to other cities”.

In this para, while emphasis is being placed on assaying and refining infrastructure, what is really required apart from this is the infrastructure to connect and interact with the people at large and facilitate the collection and transacting of the gold across the country under this Scheme. This aspect of the crucial infrastructure requirement seems to have been totally left to the banks which are going to open the “Gold Savings Account”. The banks are ill equipped to handle enquiries and processing of public enquiries, let alone market and promote the scheme. The business of banks is collecting of deposits and lending of money and not collecting gold /Jewellery under this Scheme. As such, this activity will not be in primary focus of the banks, which is what happened in the past schemes also announced by the Government, due to which the scheme failed to evoke the desired response and the remains in a moribund state.

In our view, given the long history of the Gems and Jewellery industry and strong bonding and loyalty which Jewellers have with their customers and vice versa, Jewellers are the best suited intermediaries who can help connect this Scheme with their millions of customers across the country. Further, the Jewellers also have full knowledge of Jewellery buying trends of their customers (both past and present) from their database and hence are well equipped to act as effective enablers to market and promote this scheme by targeting focused persons / organizations from their client database. This one aspect alone can make the entire scheme a great success.

3.4 Gold Collection Centres (to be included in the scheme)

  • A scheme of this magnitude cannot be rolled out without a proper sales and marketing structure in place. A well laid out sales manual and marketing program can be designed to make sure a maximum number of gold deposits are collected from across the country at a depositors’ convenience.
  • A minimum of 10000 – 20000 collection points across the country are required for this Scheme to achieve the desired goal and targets.
  • A customer may not trust his gold with any person or assaying institution as they are not known to the customer and not situated in a place of customer convenience. It is here that the Jeweller emerges as the single choice as a Collection Agent for the Scheme given the high regard and trust which the Customers place on him due to the relationship over several years / decades in many cases.
  • Jewellery outlets are generally positioned at most convenient market locations and customers generally feel at home in such an environment to discuss matters on the scheme and the view of the Jeweller is generally taken with a great amount of trust.
  • Jewellers can also have dedicated sales and marketing personnel who are able to talk to the customer in the most convenient manner in the language and tenor which the customer is comfortable
  • A marketing initiative may also be undertaken by the Government to add further credibility to the scheme, create better awareness about the scheme and help jewellers to better promote the scheme amongst its customers, thereby generating higher gold accumulation for deposit.
  • This makes the Jeweller the most ideal participant to be able to market and promote the Scheme and its benefits to customers / public at large and motivate more and more persons to come and join the Scheme.
  • Further, should the operations require, most of the large and medium sized jewelers are fairly equipped to conduct all initial melting, XRF, to derive the fundamental content of pure gold meant for deposits at his own outlet and give the depositor a tentative estimate of the gold content on refining. Once the Customer approves the broad indicative numbers provided by the Jeweller, the Jeweller can get the final assaying and refining done at the Government nominated purity testing and refining agencies and such final numbers emerging will be credited to the customers’ account.
  • Selection of eligible Jewellers, Hallmarking Centers and Refiners for this can be done based on well laid out criteria, reputation and track record of performance.
  • Further, the entire process can be made well-structured and transparent through a well drafted process of manual and audit systems.

While on this subject, GJF would like to submit that based on its analysis, some of the key reasons for the failure of the Gold Deposit Scheme (1999) were –

  • The scheme was never marketed efficiently across the country.
  • Individuals failed to be targeted while the focus was on Temples and Institutions.
  • Minimum limits on deposits were on higher side.
  • Interest offered was not lucrative enough for depositors.
  • Banks do not receive regular enquiries on gold deposits, so do not appoint dedicated staff to manage affairs.
  • Gold deposits do not receive satisfactory response on the scheme in the banks and there is was sales pitch made by the bank management.
  • A gold deposit is managed in the same manner as a cash deposit by banks.
  • Banks cannot assess, assay and estimate the gold content of any Jewellery / gold bard bought for the deposit.
  • The time frame required for a bank to conclude a deposit will be 2 – 3 days.
  • Most banks do not have the penetration required for this scheme
  • The Scheme was devoid of any exemptions to depositors who were scared of coming under the radar of the Government’s Tax network.

As such GJF once again suggests that the Collection Centre network must be very widely based with people understanding the intricacy of gold and marketing and Jewellers made an integral part of the Scheme, with only banks and refining centers, the Scheme is bound to end up with the same fate as the GDS 1999.

3.5 Purity Verification and Deposit of Gold

  • Purity Testing Centers – While all Hallmarking centers are the arms of the BIS the market knows who are the most eligible and should be considered accordingly so as not to affect the integrity of the Scheme.
  • Preliminary Test – This can be done at the authorized Jewellery store and on customers’ acknowledgement handed over to the Purity Testing Centre and Refiners.
  • Fire Assay test - This is a technical test that can be conducted by Purity Testing Centers. There are very few Hallmarking centers who have the capabilities of refining.
  • Deposit of Gold – It is of key significance that the Scheme will only work efficiently when the gold received for deposit can be assessed, tested and a confirmation given
  • by the Collection Center of the pure gold to be deposited. If the depositor receives promptness and convenience a very positive word will spread around.
  • Conditions – There should a be a proper manual of operations and processes at all stages and when anomalies are observed there should be fines / penalty for offenders and incentives for highest collectors

3.6 Opening of Gold Savings Account with the Banks

3.6.1 Gold Savings Account

  • Presently the suggested route is only opening of Gold Savings Account with Banks. It is felt that due to the rural and urban nature of our country there should also be an option to also give Demat Gold account option also to Customers, as it enables a Customer to hold all his securities in a single account which significantly reduces the challenges in tracking balances, KYC, nomination of beneficiaries etc.
  • The Demat accounts are being maintained by various Depositary participants, which are highly regulated. As in case of bonds, the gold savings held in Demat should be allowed to be traded in the stock / commodity exchanges (as per guidelines to be framed by SEBI with proper KYC checks and balances).
  • This will bring in the desired amount of liquidity to the Scheme which will enable to attract more retail participation.

3.6.2 Interest payment by Banks

  • The past GDS 1999 failed to monetize privately held gold and only saw Temple and Institutional deposits as the interest offered was too low at 1% pa.
  • The customers will only part with their gold, if they see a possibility of receiving a fair return on their asset.
  • As such besides holding the rights of ownership of the gold in the Gold Deposit Account, if the customer gets a tax free interest ranging between 2 % to 3 % per annum this may be good enough to attract the customer to bring in greater quantity of gold.
  • May be the interest rates for shorter tenure (say, one year) could be 1.5 % and for longer tenures could be on an increasing scale ranging up to (say) 3 % for a 10 year period.
  • Temples and Institutions may be offered a low rate of interest but privately held gold will only see light of day with a good interest proposition.
  • This will motivate more and more people to lock in idle gold for longer tenures which can also give banks the leverage to lend the money in a profitable manner and for longer tenures.

3.6.3 Redemption – If there a scope of easy transfer of the gold via Demat and gold accounts by a simple process, this will reduce all hassles of early redemption. Also jewellers can play a role of allowing depositors to redeem their deposits against their needs of buying jewellery or early encashment.

3.6.4 Tenure – Presently the Scheme only provides for tenure of one year with roll overs in multiples of one year. Given that Gold accumulation is being done by individuals / institutions with a long term perspective, there should also be an option given to the customer to select longer period option (say) 3, 5 or even 10 year time frame. In such a situation the Bank can also be provided with a put option to repay the deposit at the end of specified intermediary periods in the event it feels that its business risk has become significantly skewed. This will enable mobilize resources for long term lending purposes. Most of the Gold held by religious trusts, large joint families are kept for long term purposes as a family or trust wealth.

3.6.5 Tax Exemption – GJF submits that a large part of the ancestral gold lying in families as idle gold has been passed on from generations. In many cases, there is lack of proper documentation as these have been purchased by different members of the families at various points of time, some received as Streedhan, gifts on marriages and other social functions etc. As such in many cases, the depositor may face a challenge in presenting the related documentation (if asked under the Scheme). Due to this challenge, there is a lot of doubt in the public mind on whether to participate in this Scheme or not due to fear of being questioned. GJF humbly submits that if the Government clarifies that the deposits by individuals up to a certain quantum (say, 500 gm per person considering Indian tradition and customs) be given immunity from questioning or harassment by the tax authorities, there can be a huge surge in the public participation of this Scheme and it can be a resounding success.

In seeking immunity for the above limit, GJF is only requesting for a benefit similar to what is already existing in the financial sector where any person can make a cash deposit in a bank or make investment in mutual fund or purchase shares or purchase a postal savings scheme certificate or pay premium for a life insurance policy up to a threshold limit without being insisted upon to provide a PAN no and other KYC documents. It does not mean that all persons presently making cash payments are immune to the regulatory liability. They still have to explain the source of their investments if asked during assessment proceedings. In the case of gold and jewellery, as the same is handed over through generations by parents or grandparents to their children, in nearly most cases, there is no documentation between the giver and the receiver. As such for the receiver who holds the gold today to bring evidence of ownership will be extremely difficult. Considering Indian traditions, we feel that the limit of 500 grams which is Streedhan is an extremely reasonable level to keep as a threshold per individual. This limit is also well within the threshold kept for Wealth Tax purposes.

3.7 Transfer of Gold to Refiners – no comments

3.8 Utilization of deposited Gold

Banks may deploy gold mobilized under the scheme as under:

  • Gold loans to domestic jewellery industry
  • Gold loans to jewellery exporters
  • Outright sale of gold domestically
  • Sale of gold to other nominated banks.

For the services provided by the Jewellers / Assayers / Refiners, they will have a set fee structure as per industry standards. The fees could be either absorbed by the Jeweller from his fees or charged independently or paid by Bank. GJF recommends that the Jeweller should charge the depositor, 0.05 % of the value of the deposited amount based on 995 gold value as of date. The other option is for the Bank to bear such costs but this may not be viable.

3.9 Lending the Gold to the Jewellers

3.9.1 Gold Loan account – The Banks need to manage this as per their set laid out norms and need not be emphasized.

3.9.2 Delivery of gold to Jewellers – The Banks can use their resources for transfer and delivery of gold

3.9.3 Interest received by Bank –

Given the cost of payment to depositors and other costs, in the view of GJF, the Banks should lend to the Gems and Jewellery industry at around 4 % to 5 % per annum. From the current level, there may be a 1 % to 1.5 % increase in the lending rates of gold to industry, but for achieving a bigger objective of controlling imports and to unlock idle gold for economic development, GJF feels this would be fine with the industry. With more and more mobilization of gold, once a minimum target of gold deposits are achieved, Banks could be compelled to use this gold for the industry and avoid further imports.

3.10 MOU between Banks, Refiners and Purity Testing Centers – no comments

GJF’s Master Plan for Success of this Scheme - if certain approved Jewellers are appointed by the Government to aggressively market, participate and promote the Scheme, it will change the dynamics of the gold industry. It would also be an exemplary a Public, Private and Government partnership.

  • GJF submits that without the active involvement of the Jewellery trade, this Scheme will not be a success due to the inherent gaps in the scheme’s structure as detailed above.
  • GJF based on the interactions with its Members across India comprising of several very large multi showroom, large, medium and small jewelers is confident that with the active involvement of the Jewellery trade in this Scheme, and good support from the Government, the Jeweller community can easily help in mobilization of over 200+ tons in the very first year (after an initial preparatory period of 3 months post the launch to appoint the necessary stakeholders and generate interest in the market).

3.11 Case Study on Turkey’s Gold Monetization Scheme (for comparable study)

Turkey’s relationship with gold is similar to that of India. Gold plays an important role in its religion and culture. The Turkish Central Bank estimated that “under the pillow” stock of gold in 1984 was well over 2000 tons. Some reports indicate that in 2013, it was close to 3500 tons, which was around 12 percent of their GDP. However, unlike India, Turkey has a small but growing gold mining industry.

Turkey's policy makers realized the important contribution gold makes to the economy. In 2013, jewellery exports, most of which was gold, was $3.3 billion. Price Waterhouse Coopers estimated that bar, coin and jewellery consumption and fabrication in terms of gross value addition contributed nearly $3 billion to the Turkish economy. In addition, gold recycling would have added $1 billion. The gold industry is estimated to employ around 2,50,000 people. Given the valuable contribution of gold to the economy, circumstances forced the policy makers to innovate in order to reduce the adverse impact of gold imports on the CAD and attempt to bring into circulation some of the “under-the-pillow” gold stock.

During the global financial crisis of 2011, Turkey was faced with a large CAD. There was a serious danger of capital flight and currency depreciation leading to insolvency. In order to tackle this crisis, Turkey's policy makers designed an innovative policy called the Reserve Option Mechanism (ROM), which allows commercial banks to maintain part of their statutory reserves requirement in gold or foreign currency.

Theoretically, it is possible to demonstrate that this policy instrument (ROM) will (i) reduce volatility in exchange rate, (ii) reduce the impact of foreign currency inflows on the financial sector, and (iii) reduce the cost of domestic currency liquidity requirement of the banks as they can now meet their reserve requirements at a lower cost. Consequently, this would also bring into circulation “under-the-pillow” gold and have a positive impact on the current account by reducing imports.

However, in order to ensure that ROM would achieve the desired objectives, Turkey's policy makers realised that all the stake-holders involved in the process would have to be incentivized and the required infrastructure put in place. The stakeholders identified were the consumers, the commercial banks, the Central Bank, and the Government.

Studies have shown that the individual is prepared to participate in a gold deposit scheme provided the interest earned is at least 2-3 per cent, the period of deposit (compulsory) is about 3-4 years and the minimum quantity is not very large. In addition, an extremely important requirement is purity verification by an internationally accredited laboratory to be done in the individual's presence. Naturally, ease of paperwork, easy withdrawal, nomination facilities, tax benefits and the like are some other pre-conditions.

Banks will participate in the scheme depending on the relative cost of holding gold to that of domestic currency holding. The relative cost of holding gold would include the interest to be paid as well as the transaction cost (which would include the cost of storage). Accordingly, these factors would have to be kept in mind in designing the ROM. The Central Bank would be interested in reducing the volatility in the financial sector and increased stability of the exchange rate. The Government's interest would be served by way of a reduced CAD and putting gold to productive use.

The success of the ROM was underpinned by the development of necessary infrastructure, which is a precondition for the success of any Gold Monetisation Scheme. Turkey allowed banks to buy and sell gold coins and encouraged banks to introduce a variety of gold-structured products like gold current accounts, gold accumulation plans, gold lending products and the like. Consequently, banks encouraged refiners and jewelers to set up a network of bank-authorised centers to collect recycled gold after verifying its purity. This necessitated developing world-class facilities for determination of purity in a short time-span to the satisfaction of the customer. This also resulted in improving the quality of gold used in Turkish jewelry, thereby improving the quality and workmanship of Turkish jewelry.

4.0 Final Comments

Given our above submissions and the success of the specific Turkish Gold Scheme due to the active involvement of the Jewellers, it is humbly requested that the Jewellers be made a significant stake holder in the said Scheme as they have the bandwidth, understanding and knowledge of gold and the consumers. We can assure you that the Jewellers will work on this Scheme aggressively to ensure that they are able to make it a resounding success. GJF will feel honored, if it is allowed to participate actively with the Government in the positioning and marketing of this Scheme.

The Jewellers’ community has vast experience, knowledge and integrity, and has extensive presence across the country with significant presence in over 300+ cities and can create a giant national network of over 10,000+ collection centers for gold under this Scheme. This will be a unique initiative designed on the lines of Public Private and Government partnership with support from the people who deposit, to the beneficiaries, banks and Gems and Jewellery industry.

To appoint one apex industry body having National presence to coordinate on the industry’s behalf. A joint Committee of all entities with Government representatives be formed to brainstorm, structure and build a practical Gold Monetization Scheme.

Topics

Acts Income Tax