Economic Highlights

New Delhi, 30 March 2012

Gold Tax Lead To Smuggling

CUTTING NOSE TO SPITE FACE

By Shivaji Sarkar

 The new four per cent tax on gold import and tax deducted at source (TDS) for purchasing gold over Rs 2 lakh is likely to lead to higher smuggling and cause more revenue loss than earnings anticipated.

Importantly, in a regime where tax rates are needed to be lowered and simplified such steps cause more adverse effects. The almost fortnight long strike by bullion traders has led to a loss of Rs 12,000 crore of business ---  a supposed loss of Rs 450 crore calculated at four per cent tax levied in the Budget.

In fact, the new tax might have more adverse effects than visible. The rich are likely to be hit less while the poor and marginalised, both in cities or villages, are likely to lose more.

In the absence of access to banking and less confidence in paper currency, large sections of the marginalised population still use gold as a saving instrument as they are deprived of financial inclusion.

The rich too invest in gold is due to the decision to tax interest earnings on bank deposits. Notwithstanding, the policy makers argument that imposition of the tax on gold is because black money is being turned into gold.

Undeniably, the demand for gold has increased almost in proportion to the lower savings rate. It might mean savings are being put in instruments where people could save on extortive demand for taxes.

Indeed, this calls for immediate review of the decision to tax small interest earnings like Rs 5,000 till last year and Rs 10,000 as proposed in the 2011-12 Budget. It is true the Government is earning some taxes from interest earnings. But it is also correct that many who were putting their money in banks have decided to bank on gold. Thus, it is not correct to term all the money invested in the yellow metal as black.

This calls for reform in the thinking process. Deposits or savings are put in banks by people after they have paid tax. Demanding tax on such deposits is a dis-incentive for keeping money in banks or any other savings instrument.

Undoubtedly, it would be prudent to do away with the tax on deposits to encourage flow of funds to legal instruments. This would not only increase the flow of funds but also solve the problem of liquidity the banking sector is facing presently. The Government would save thousands of crores that it has now decided to put in re-capitalisation of banks.

Besides, taxing deposit is an imprudent measure. It only diverts funds to instruments like gold, which is considered a safe investment option. Freeing the bank deposits would solve many problems, including a huge amount wasted not only by the Government in calculating such taxes but also by individuals.

Banks themselves have to spend a huge amount for such unnecessary accounting and paper work thereby reducing liquidity. As all these savings would lead to higher earnings by the Government which needs a more pragmatic approach.

In addition, there should be easing of norms for opening new savings or other accounts with banks. The banking process should be open to all. Shutting doors on those who want to put money in banks would only lead to and encourage illegal transaction methods like ‘hawala’.

Time for the nation to think out-of-the-box to attract money to legal channels as this would help the economy grow faster. Remember, stringent restrictions are always counter-productive. It not only leads to higher expenditure in monitoring but also results in diversion of funds to other channels and consequent troublesome procedures.

Significantly, the State has to realise that in ancient times the tax concept started as a voluntary contribution. Whereby, all civilisations resented demand for high taxes or cumbersome procedures. Also, despite opting for market economy two decades back, India still has to come out of the mindset of socialistic controls dating to the pre-liberalisation era.

Pertinently, more the controls the more would be the devious means of diversion. This does not help a healthy economy.

Furthermore, not so long back, India used to spend a huge amount to stop gold smuggling. In 1991 when Manmohan Singh became the Finance Minister, the country moved away from the concept that imports of consumer and luxury goods was bad. Customs duties on gold were removed leading to the collapse of gold smuggling and related criminality. This measure itself saved the Government a huge unnecessary expenditure.

Once again the country is slipping back to old policies. People forget history but those making policies should not. As gold is easy to smuggle. There is no gainsaying that by imposing such taxes, funding for Bollywood movies would be made through smuggled gold from Pakistan or Dubai. This would also have an adverse impact on the sliding international value of the rupee.

Moreover there is a gender aspect to gold as well. Women in poor and even rich families still feel marginalised within the family. They put their small savings into gold or buy gold on loan from the local jeweller. They repay it in small amounts, whenever they can save money. In the end, they own a liquid financial asset, which they can sell or use as collateral or pawn it for taking a loan.

The rural rich families too still put their savings in gold. Primarily, because they trust banks less. For three reasons, one, the interest rates are low, second, procedures to avoid even legal tax is cumbersome and lastly, deposits earn less than the loss one makes in terms of inflation. Whereas, in gold they feel it would keep pace with inflation.

In addition, gold gets one loans easily without too much of paper work. But the recent RBI step in raising interest rates on gold loans would reduce the value of gold from the present 80 per cent to 60. This might again divert small gold investors from non-banking financial institutions to the village money lenders.

In the ultimate, the nation has to recognise that inflation is a problem. It cannot be wished away by increasing interest rates. Think. In 2010 Turkey cut interest rates despite high inflation. This not only revived its industry, earned more revenues for the Government but also prices came down.

Clearly, higher gold imports should not be seen as a problem. This could be solved through better financial inclusion and a non-repressive simplified tax system. Whereby, gold would not lose its importance by making the taxman step in or by making it difficult to obtain a gold loan. Lower inflation and interest rate might suffice. Else, gold would continue to be smuggled in. A case of cutting the nose to spite the face! ----INFA

(Copyright, India News and Feature Alliance)