The government-benefit angle has two parts: one where it is likely to gain due to the lower SGB redemption price; second, where it will lose customer revenue due to lower duty on imported gold. While it is true that the government may have benefited from this policy decision of lowering the customs duty on gold, the missed opportunity of getting more tax revenue from higher customs duty on gold far outweighs this benefit.
How did the fall in price of gold affect SGB 2016-17 Series I investors
SGB 2016-17 Series I investors had to put their bonds for final redemption at a price of Rs 6,958 per unit of SGB. The date for final redemption was August 5, 2024.
As per the India Bullion & Jewellers Association (IBJA) website, the 999-purity gold AM price was Rs 72,60.9 per gram on July 23, 2024. The 999-purity gold price was Rs 69,699 on August 5, 2024 (AM price). The 999-purity gold price is Rs 68,904 on August 6, 2024 (AM price), according to the IBJA website. As the redemption price was set Rs 6,958 per gram, the absolute loss due to the post-budget price fall appears to be Rs 302.9 per gram or 4.17%.
As per CA Abhishek Gupta, Founder and Managing Partner, Pierag Consulting LLP, “The recent reduction in customs duty on gold from 15% to 6% may impact the returns from SGBs due to the decrease in gold prices. However, this is expected to be balanced by the potential increase in gold prices due to higher domestic demand during festive seasons and other global factors. Thus, while there might be a short-term impact on returns, the long-term perspective remains optimistic.”
Investors in this SGB series will experience further losses as they wait for the maturity amount to be credited to their bank accounts. This comes at a time when both domestic and international gold prices are on the rise due to economic events and global geopolitical uncertainties.On the domestic front, the 999-purity gold price is Rs 68,904 on August 6, 2024 (AM price), according to the IBJA website. On the international front, according to a story by The Economic Times, which quoted Reuters, “Spot gold was up 0.2% at $2,411.97 per ounce, as of 0200 GMT. U.S. gold futures rose 0.3% to $2,452.60.”According to the Multi Commodity Exchange (MCX) website as of August 6, 2024 2.19 pm, the price of gold futures was Rs 69,410 and it was up by Rs 101 or 0.15% from the previous day’s closing price.
How much money did the government potentially make and lose by reducing customs duty on gold?
The government issues SGBs which are repayable after eight years. The price at which the redemption and premature redemption will happen depends on the last three business days’ average price of gold as published by the IBJA.
According to experts, although the government may experience only a marginal gain from reduced payout liabilities on SGB redemptions, it could face substantial losses from potential revenue reduction resulting from taxing gold imports.
According to Aksha Kamboj, VP, India Bullion & Jewellers Association and Executive Chairperson of Aspect Global Ventures, “Revenue loss to the government may be approximately Rs 26000 crore due to customs duty cut but the same is likely to be compensated by import of gold through the official channel. The Government will benefit up to Rs 620 crore in the F.Y 2024-2025 on account of redemption of SGB, as nearly 10 tons of gold bonds will mature in F.Y 2024-2025.”
According to Kamboj, the sharp fall in price of gold after the Budget 2024 announcement is not entirely attributable to this. “The Gold price in India fell due to custom duty cut but the international market fell as China stopped buying gold. It is difficult to identify the share of each factor for the fall in gold price, but the duty cut in India by 9% (15 to 6%) is a major factor.”
Did government reduce customs duty on gold just to target SGB investors?
On social media several people are speculating that the government reduced customs duty on gold to reduce its expenditure on redemption of SGB. However, this is not the case. As seen from data provided by IBJA, no government would want to make Rs 620 crore by losing Rs 26,000 potential revenue.
According to Sachin Kothari, Director of Augmont – Gold for All, “The Sovereign Gold Bond (SGB) issuance began in November 2015 and was intended to provide a secure and simple alternative to physical gold. But SGB is one of the most expensive tools for government borrowing now as gold prices have elevated. And it seems, uncertain whether the government will issue new securities during the current fiscal year. When the SGB plan was implemented in 2015, the customs tax was set to 10%. It was later raised to 15% in 2019, 2021, and ultimately in 2022. These duty hikes resulted in bigger returns for investors, which raised the government’s redemption liabilities. If there had been no customs duty cut, gold prices would have been trading around Rs 7600/gram, which would have led to an outflow of nearly Rs 2090.65 crore.”
The fact that SGBs have emerged as the most expensive bonds for the government is true but that is not the real reason behind the government’s decision for customs duty cut.
According to Kothari, “The core reason for lowering customs tax on gold in India is to create a balanced, transparent, and competitive market that reduces illicit activity, promotes industry growth, and coincides with larger economic goals.”
According to Kambhoj, “The Government has already stated that they wish to control illegal import of gold in the country and hence this is the major reason to control gold price.”
Considering the substantial net loss that the government is expected to face as a result of the reduction in custom duty, it doesn’t seem likely that the government intended for SGB investors to suffer losses upon redemption.
