Budget 2023 and gold ETFs – Is a positive change in the offing?

Date : 27/01/2023
Read: 3 mins

Gold ETFs and Budget 2023

With the budget announcement on the horizon, everyone is keeping their fingers crossed for effective changes that would benefit them. While taxpayers are waiting for increased tax reliefs, the industry is waiting for profitable changes that might drive their growth. The gold industry is no different.

In the last budget, no relief on gold import duty was allowed. Coupled with this, crude prices jumped after the Ukraine-Russia war broke out. The war and its effect on crude oil prices affected the Indian currency, which fell from Rs.74.5 to Rs.77 against the US Dollar within a few weeks.

All these factors combined to push inflation rates, and investors resorted to the popular safe haven – gold. This led to a spike in gold imports in the first quarter of the financial year 2022-23.

Furthermore, in July 2022, the government increased the import duty on gold by 5%, bringing it to 12.5%. This was done to manage the increasing current account deficit, reduce gold imports, and strengthen the rupee against Dollar. Following the hike, the landing price of gold in India saw a difference of 18% after adding cess and service tax to the import duty, making gold more expensive.

As duty on gold jumped, reports of illegal smuggling of gold also rose, costing the government money on a lower collection of duty and GST. Despite India being the second-largest importer of gold, it continues to be a price taker, given the customs duty applied to the metal.

The gold industry demands a rationalization on the import duty of gold to make the domestic gold price at par with international prices. This will prevent illegal gold movements and price distortions in the market.

The gold industry, thus, expects the budget to reduce the duty levied on gold for parity with international markets. Moreover, the financial world wishes for preferential tax treatment on gold-backed investments such as Gold Exchange Traded Funds (ETFs). This will boost the popularity of these financial investment instruments over physical gold investments.

Experts have even suggested ways in which gold ETFs can be made popular. These are as follows –

The long-term capital gains (LTCG) tax on gold ETFs can be charged at 10% instead of the current rate of 20% with an indexation benefit.
The holding period for LTCG can be reduced to 1 year against the current 3 years.

A word about gold ETFs

Introduced in 2005-06, gold ETFs allowed investors to invest in gold-backed funds without holding physical gold. It proved cost-efficient and safe. Data published by the Association of Mutual Funds of India (AMFI) also pointed to the growth in gold ETF investments. The folios increased from 3.5 lakhs in December 2019 to 46.4 lakhs by December 2022. The net AUM (Assets Under Management) into these schemes has also jumped to Rs.21,000 crores compared to Rs.5800 crores during the same period.

However, reformative measures taken in the upcoming budget can make ETFs more popular. Meanwhile, the industry can only hope for the suggested measures and wait to see what the finance ministry actually comes up with.