Trading gold as electronic receipts

Capital markets regulator Sebi has put out a timely consultation paper on the framework for a national gold exchange. India is huge consumer of gold no doubt, of the order of 800-900 tonnes annually, and we have massive holdings too. Yet, India is a passive price-taker in the global gold markets, with precious little price-setting influence. The plan now is to revamp the entire ecosystem for domestic trading and physical delivery of the yellow metal. The idea, rightly, is to bring about an efficient and transparent spot price discovery, have due assurance of gold quality, induce greater integration with financial markets, and lead to increased recycling of gold nationally.

The paper seems to have envisaged innovative market design for the rightful financialisation of gold, in the form of electronic gold receipt (EGR), complete with vault managers, depositories for EGRs, stock exchanges, clearing corporations and independent gold assayers. However, when it comes to tax design, the paper seems far less clear-cut. This is little different from trading in commodities backed by warehouse receipts. It says goods and services tax (GST) may be applicable on conversion of EGR to physical gold, there may be issues when it comes to levy of state GST, and maybe IGST alone shall be applicable at the time of withdrawal of gold from the vaults. Where does this conversion come from? A fee for storing the gold, at so many rupees per kilogramme, and GST on that fee would be understandable. There is no need to spin spurious services out of thin air. Similarly, a Securities Transaction Tax (STT) on EGRs would discourage trading.

Since October 2018, Sebi has okayed the concept of universal exchanges wherein stock markets trade in both equities and commodities, for better utilisation of resources. It makes sense to trade EGRs on existing stock exchanges, perhaps as a new asset class in an existing trading segment. A set of norms for vault managers and a minimum net worth of ₹50 crore are fine. EGRs would be a welcome new investment asset.