Indians have always invested in gold for weddings, gifts and as a hedge against inflation. But now there are other reasons—investors feel harassed by the tax and regulatory authorities. Can the FM and other authorities do anything about them?   

The central government is restless and the Reserve Bank of India (RBI) is nervous over the rising current account deficit (CAD), but people are impatient. The general public feels that the recent fall in the price of gold is temporary, it will rise again. So they want to buy as much gold as feasible as quickly as possible. This psyche of people has given rise to increasing demand for gold, which is making the government’s efforts at controlling CAD difficult. The CAD is the shortfall between what our country earns in foreign exchange through exports plus inward remittances and what our country spends by way of imports and outward remittances. This gap has reached a level of 5.4% of our GDP (gross domestic product) which is considered very high by the credit rating agencies. India is one of the biggest importers of gold which is the reason for the high CAD prevailing at present. 

There is a palpable anxiety in government circles, that if it fails to control the CAD, inflation may go haywire, GDP growth may suffer and the chances of India’s credit rating being downgraded are high. And if this happens, it can have catastrophic ramifications for our economy. That is the reason for the worry.

With a view to reduce the demand for gold, the government has taken a series of steps. The import duly on gold, which was just 1% till the beginning of last year has been increased as many as four times during the last 18 months, taking it to 8% at present. The RBI has brought in a series of restrictions on granting of loans on the security of gold, both by banks and gold finance companies. Besides, the central bank has put a lot of conditions on import of gold by jewellers and selling gold in the domestic market. The finance minister (FM) has appealed to the people to resist the temptation to buy gold.

Read: “Stop buying gold, says FM: unapologetic that savers have so few options”.

How to bring down the lure for gold? The gold mania is not new in our country and every Indian family believes in investing in gold jewellery not only for their personal use, but also as a hedge against inflation. But now there are more reasons to it than mere weddings and inflation. Here are two live examples of what people feel today about the messy investment options available in India. 

Why bank deposits are shunned by common people? A senior citizen told me that he got a big remittance from his daughter from the US and wanted to know more about the investment options without much hassles. When I suggested that his daughter being a NRI could invest in NRE and FCNR deposits in banks in India, free of Indian income tax, he said that his daughter did not want to invest in her name in India, as it caused tax problems for her in the US. Though NRE/FCNR deposits are tax-free here, laws in US require her to declare her income earned in India and pay tax over there. So he wanted to invest in his own name, without any hassles of TDS, filing of income tax return, etc, but in a safe and secure way. As he did not want to take any risk of investing in shares, he ruled out investing even in mutual funds. He did not feel comfortable to invest in bank deposits too as he said that it attracted TDS and consequent falling into the trap of never ending queries from tax officials. After considering all options, he only wanted to invest in physical gold coins which, he said, was the best option in today’s environment.

When I mentioned to him that our FM had appealed to people not to invest in gold as investing in gold upsets his apple cart, he said that unfortunately the FM did not seem to know the sufferings of common people, who got harassed from all sides, by banks, tax collectors, cheat funds, market manipulators, all and sundry, while the bigwigs minted money by hook or crook and went scot free. The best way for people to avoid all hassles was to invest in physical gold, which had given much better returns, with no paper work, no income tax, no TDS, no questions asked, but safe and secure, he said.

A woman’s lure for gold is not for jewels alone!

Here is another example of what an elderly woman—senior citizen—told me a few days back. As she was getting old, she said that she had converted all her investments in to cash and wanted to invest in physical gold, so that she can easily encash the gold coins as and when she wanted to raise some money and leave the rest to her kith and kin. She was tired of replying to tax authorities, insurance conmen, and a host of wealth management experts, who were bent upon making life difficult for common people. She said that the bank deposits were the worst investment options, as the returns were not only low, but subject to TDS and income tax, etc, which was making life complicated. While the rich have got their huge corporate dividends free from tax, the ordinary middle-class were squeezed by the tax authorities by making interest earned on their hard earned money taxable.  Despite the ups and downs in the price of gold, she was sure that gold was an appreciating asset and prices would keep on rising due to the short supply of the yellow metal. She did not want to buy jewels; she was clear in her mind that gold coins were the best bet for long term investment as they have a ready market at all times, war or peace.

This is a representative sample of what ordinary people feel about the investments options available in our country. It is difficult to wean away people from the lure of gold, unless the government comes out with innovative investment options with least paper work, no tax hassles, and no harassment from banks and government institutions. How can this be achieved?  Here is a practical suggestion for the government to consider in the interest of bringing down gold imports for all times to come.                                    

Exempt bank deposits totally from income tax without losing tax revenue: At present, corporate dividends are tax-free at the hands of shareholders, without any loss to the government, thanks to the system of taxing the distribution of dividends at the hands of companies and corporates who declare dividends. This has saved lakhs of investors from the rigmarole of filing tax returns to get paltry refunds from tax authorities, when dividends were taxed at the hands of shareholders.

Similarly, the long-term capital gains on shares are totally exempt from tax if the shares are sold through the recognized stock exchange. This is achieved without any loss to the exchequer by easily collecting the revenue through the levy of securities transaction tax while buying and selling of shares through the recognized stock exchanges. This has saved considerable time, energy, money, paper work and tax worries to millions of investors in the stock market.                                                                   

On similar lines it is possible to make interest on bank deposits free from income tax at the hands of depositors, by simply levying a small percentage of tax on the total interest paid by banks on deposits, making it obligatory for banks to pay this small percentage of tax every quarter to the government without deducting it from the interest paid to the depositors. There should be no income tax at the hands of bank depositors and all taxes should be absorbed by the banks just like dividend distribution tax is absorbed by the companies. This will be the biggest incentive for people to invest in bank deposits, which if made tax-free will serve as the best investment option for the rich and the poor alike, without any loss of revenue to the government.   

This will not affect the profitability of banks as this will give a big boost to the deposit growth of banks, and it will provide them an opportunity to lend more and earn more through increased turnover. The government, on the other hand, should be happy to receive the revenue in lump sum from the banks with least expenditure on collection of taxes. There will be no TDS, no tax on bank interest, no need to issue any certificates of TDS, no customer complaints against banks, no tax refunds to bank depositors and no harassment of bank customers. This will give a shot in the arm to the economy by giving a boost to the savings rate in the country. This is the best bet for weaning away people from investing in gold, thereby helping to reduce import of gold considerably. 

Conclusion:

This is the right opportunity for the government to achieve several objectives at one stroke. This one step of totally exempting bank deposits from income tax, without losing any revenue for the government, will not only help in weaning away people from investing in gold, but will also serve the purpose of discouraging people from investing in risky Ponzi and other collective investment schemes promoted by fly-by-night operators in different names, over which no regulator has full control. Besides, the banking sector, particularly, the public sector banks will be the biggest beneficiaries of this innovative step, helping them to substantially improve their business and profits, thereby reducing their reliance on the central government for capital infusion, which is the cause of fiscal deficit as well. But equally important, this one bold step will help in winning the goodwill and gratitude of a large majority of middle class population of this country running into several crores of bank customers, as they will get immeasurable relief from the harassment they face at the hands of different agencies for being honest and sincere in their daily life. This simple but most effective step, in short, can go a long way in building a strong economy and return to the heydays of low inflation coupled with high growth of the economy which can create a lasting impact in the life of ordinary citizens of this country.

 (The author is a banking analyst and writes for Moneylife under the pen-name of Gurpur .)