India’s electronic gold receipts trade may run into GST hurdles
The trading in electronic gold receipts (EGR) launched by NSE will likely hit the GST bump, especially for the bullion dealers generating the gold receipts.
EGRs are like depository gold receipts traded on the stock exchanges and held in demat accounts, just like shares which can be rematerialised for physical gold.
As part of EGR framework, large importers, bullion dealers and retailers with Rs.20 lakh of gold can deposit gold in exchange-designated vaults for generating EGRs equivalent to quantity of gold deposit. These receipts are listed on the exchanges for trading.
Buyers of EGRs have the option to trade them further on the exchange platform or convert it into physical gold by surrendering them at the exchange-designated vaults.
Not simple task
While EGR as concept appears simple on paper, a leading bullion dealer said once imported into India gold bars cannot be moved out of the bank vault or traded without paying GST of three per cent.
Once GST is paid and deposited at exchange-designated vaults for generating EGRs, the seller has to wait till these receipts are converted back into physical gold again for claiming the GST credit back, he said.
Narinder Wadhwa, MD and CEO, Ski Capital Services, said GST implications arise when physical gold is deposited for EGR creation and more importantly, when EGRs are converted back into physical gold.
For retail investors, any GST paid in the process generally cannot be claimed as Input Tax Credit, resulting in a portion of their capital being locked up without earning any return, he said.
NSE statement
If an investor holds the EGR for months or years before seeking physical redemption, the GST component effectively remains a dead investment during that period, he said.
The GST friction remains one of the major factors limiting wider retail participation in EGRs despite the benefits of exchange-traded gold receipts, said Wadhwa.
In response to businessline query, NSE said suppliers of EGR might have suffered 3 per cent GST when they bought physical gold, but the impact of GST might have been passed on to the ecosystem already. That is also possible, it said.
For instance, “a Gold ETF might have bought physical gold when they saw inflows, but the GST that they have paid and capitalised as an asset has been factored in the NAV computation,” it said claiming GST is not an issue in EGR.
Many ways to use
A retail investor with Rs.20 lakh worth of gold can also create EGRs to that extent and use the EGR in many ways as and when permitted, it said.
For example, EGR can be lent as part of SLB (security lending and borrowing, used as collateral. EGRs can be traded via the standard broker apps. The market ecosystem is getting ready for this and systems are being tweaked and readied, he said.
Retail investors can free up GST by quoting appropriately in the EGR segment (by factoring the GST into the price that they would like to receive). Based on demand-supply equation, an order might even go through, particularly in smaller denominations where 3 per cent is not such a massive number, said NSE.
