Executive Summary
Indian Government since 2015 has taken various steps toward the digital economy. Regulation of Gold Exchanges and provision of an ecosystem that would enable transparent and efficient exchanges of gold was essential to meet the objectives of digital economy. Parliament in Budget 2018 first proposes to regulate the gold. Union Budget 2023 is yet another step in the digital Gold Economy as the Finance Bill 2023 proposes the series of amendment governing conversion of physical gold into electronic gold receipts and vice versa. It proposes to exclude the conversion of physical gold to Electronic Gold Receipts from the meaning of transfer as per section 2(47) of the Income Tax Act, 1961.
Background
Gold can be used for multiple purposes, including investment, consumption, and as a medium of exchange. India is one of the largest consumer and importer of Gold in the world. However, despite this fact, the gold market in India is largely unorganized, lacking an ecosystem that enables transparent and cost-effective gold exchanges.
Indians always prefer Gold as an Asset class for investments due to cultural and religious values attached to it along with its safety of returns. Price volatility of Gold is less as compared to the equities and therefore many investors prefer to invest in gold to diversify their portfolio. In the last 3 years major Gold Funds (Mutual funds investing their portfolio in Gold) has offered approx. return close to 26.3% which comes to ~8% on the annual basis.
Parliament first time in Budget 2018 has come up with the proposal to regulate the gold markets in India and then Finance Minister Shri Arun Jaitley has mentioned in the speech about formulation of policy to regulate the gold markets in India.
“The Government will formulate a comprehensive Gold Policy to develop gold as an asset class. The Government will also establish a system of consumer friendly and trade efficient system of regulated gold exchanges in the country. Gold Monetization Scheme will be revamped to enable people to open a hassle-free Gold Deposit Account”
Later in the Union Budget 2021, SEBI was proposed as the regulator and Warehousing Development and Regulatory Authority and entrusted to develop the commodity market ecosystem in India.
Accordingly, SEBI has come up with the SEBI (Vault Managers) Regulations 2021 to providing regulatory framework for gold exchanges. Government of India vide notification dated 24.12.2021 notified Electronic Gold Receipts as Securities within the meaning of section 2(h) of the Securities Contract and Regulations Act 1956.This amendment implies that Electronic Gold Receipts would now be treated as securities just like as equity shares or derivatives and the investor would therefore buy and sell gold just like the equities.
Forms of Digital Gold.
Digital gold is not the new concept for Indian Economy. Apart from Electronic Gold Receipts there are several other forms of digital gold like Sovereign Gold bonds and Gold ETF.
a. Sovereign Gold Bonds– Indian Government in year 2015 come up with the Sovereign Gold Bond Scheme 2015 providing an option to the investor to invest in gold digitally. These are the government securities denominated in 1 gm of gold having its returns linked to the market price of the gold. Apart from return in the form of capital appreciation, bonds also provided Interest @2.5% per annum making it as the hybrid security.
These bonds are not charged to capital gain taxation it they are held till maturity. Section 47(viic) of the Income Tax Act 1961, excludes transfer of Sovereign Gold Bonds by way of redemption from the meaning transfer u/s. 2(47) of the I.T Act 1961 thereby excluding the same from the ambit of capital gain taxation.
b. Gold ETF- Gold ETF (Exchanges Traded Funds) are the class of Mutual Funds investing their major funds in the portfolio of the gold and gold related securities. Investor would get the exposure of gold prices by investing in such mutual funds. Also being traded on the Stock Exchanges, investor would easily buy, sell and trade in the units of Gold ETF just like equities.
Why Amendment was required
Section 45(1) of the income tax act is the charging section of Capital Gains Taxation and provides that any profits and gains arising on transfer of Capital Assets affected during the previous year will be charged to tax under the head “Capital Gains”. Thus, there are two elements necessary for brining any transaction under the ambit of capital gain taxation- first there must be capital asset and secondly there must be transfer. Section 2(47) of the Act defines “transfer” and inter alia provides that transfer in relation to capital assets includes Sale, exchange and relinquishment of capital assets.
Conversion of physical gold into Electronic Gold Receipts can be seen as transfer and therefore can be brought into ambit of Capital Gain taxation. Therefore, there was lots of ambiguity as to tax treatment on the said transaction.
In order to remove the ambiguity and to promote the concept of Electronic Gold Receipts, Parliament has come up with the series of amendment under the Income tax Act. These are as follow:
a. Amendment to Section 47
Section 47 of the Act excludes certain transaction from the meaning of transfer and thereby excludes them from the scope of Capital Gain Taxation. Parliament seeks to insert one more clause under this section which is read as
‘’(viid) any transfer of a capital asset, being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt into gold.”
Thus, by excluding the conversion of physical gold to EGR from the meaning of transfer parliament intends to defer the capital gain taxation that would have otherwise arise.
Note- Definition of Electronic Gold Receipts and Vault Manager will be governed by SEBI (Vault Manger) Regulations 2021.
Other than the above amendment certain consequential amendments governing cost of acquisition and holding period was also made. They are read as under:
a. Amendment to Section 49 – Deemed Cost of Acquistion
Section 49 of the Act governs the deemed cost of acquisition in certain cases. Finance Bill 2023 proposes to insert Clause 10 which is read under as-
In case of conversion of Physical Gold to EGR- Cost of acquisition of Physical gold shall deemed to be cost of acquisition of EGR.
In case of conversion of EGR into Physical Gold- Cost of acquisition of EGR shall deemed to be cost of acquisition of Physical Gold.
b. Amendment to Section 2(42A)- Holding Period
Section 2(42A) was also amended to provide that the holding period of physical gold or EGR shall include the period for which the EGR or physical gold (earlier asset) was held by the assesses prior to its conversion.
Note- Holding period is necessary to determining whether the capital asset is Short Term Capital Asset or Long-term Capital Asset and accordingly tax is charged.
Note: Section specified in the above article, unless the otherwise specified related to the Income Tax Act 1961.
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