Gold VDIS for better CAD and Fiscal Deficit

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Indians’ love for gold is in the open. From festivities to investments, almost every other Indian hinges on gold. Even if we leave apart those hefty gold investors, even the Tier-II and Tier-III towns play a key role in driving the demand for gold in India. Shares and stock market are unknown in such provinces, and beyond a savings bank account or a savings scheme under the Post Office, rest is the holdings in gold. No bills, no accounts, and hence most of our gold purchases remain disguised. This adds to the already-high unaccounted money which easily beats the taxing authorities. We talk about dealings in real estate transactions that contravene with the legislation by bringing only the 60-70 per cent of transaction value under the tax bracket. Here, shall the authorities not pay heed to a crucial fact that gold has always been a relaxed way to conceal black money?

Records reveal that Indians own over 25,000 tonnes of gold. On a yearly basis, almost 900 tonnes is added to this holding. If measured in terms of currency, the value of this gold is USD 1.2 trillion. Being the world’s top bullion consumer, and sometimes second to China, import of this precious metal remains always at its high, accounting for our trade deficit. The upsurge in the inbound shipments has many a times been followed by a hike in tax on import. In order to maintain the current account deficit to a sustainable level, gold imports have always been a target. Now all that consumption of gold in our country is not just confined to jewelry purchases; a substantial portion of this can be attributed to investments in gold. And all such purchases are rarely backed by invoices, thus rendering the transactions go unaccounted for. USD 1.2 trillion or even more, that we have in the form of gold, is something that has a dirty nexus with black money.

Vital to note, the study, that was presented a couple of months ago to the new SIT on black money and to the Finance Ministry, reveals that the extent of unaccounted money in India may be as high as 71 per cent of the GDP. This means that this dirty parallel economy could be up to USD 1.4 trillion. The report lays special emphasis on the role of gold with respect to laundering of the unaccounted money. The Indian gold market is as non-transparent as the real estate market, as per the report, which tells how easy it is for anyone to park black money in gold. The CBDT too reported a couple of years ago that procurement of gold bullion and jewelry is the second largest parking lot for the unlawful money next to the real estate sector. A 1-percent tax on purchase of gold by any manufacturer/ retail customer was the way to collect tax on cash acquisitions owing to the outlook that such cash may have come from an unaccounted source.

In the search and seizure operations of the Income Tax Department, cases have shown that enormous sum of black money converted to gold and jewelry is stockpiled safely in bank lockers. World Gold Council counts India’s annual gold imports at a breathtaking above-900 tonnes, which means that almost USD 50 billion flows in India in the form of gold and is then acquired without any audit trail. Real estate dealings can be made less vulnerable to black money laundering by ensuring declaration of true value and entire receipt flowing into the economy; however in case of gold, upsurges in import duty or levying of tax on cash purchases cannot be an ample measure. Directorate of Income Tax, in an investigation conducted in 2009-10, found that the real estate, and the gold jewelry and bullion sectors, along with the manufacturing sector account for the leading chunk of unaccounted money. The government, hence, needs to pay heed to gold.

Herein, the government must urgently consider coming up with a scheme for voluntary declaration of any hidden holdings in gold. The declared gold can be taxed at 30 per cent and then be allowed to flow freely, thus helping lessen our gold imports and trimming down CAD. Tax evaders would pay taxes, and interest and penalty (at lesser rates), along with the promise to keep their identity unrevealed. Plus, source of income should not be asked. The measure can conclude to unearthing of at least 40 per cent of black money laundered via investments in gold. This would roughly sum up to USD 400 billion. Tax of 30 per cent would mean addition of USD 120 billion to the government’s treasury. This, on one hand would bring down the fiscal deficit, add to the economic dexterity by pumping up education, healthcare, agriculture, and industrial sectors by way of dedicated allocation of funds, and by adding almost 12000 tonnes to our gold, this would render zero import of gold for next 12 years, thus trimming down the CAD.

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