How Duty Cuts Will Hit Bullion Players With High Inventory
Value of gold inventory pledged with banks declined by 9% triggering heavy margin call pressure. Rough estimates suggest inventory at 300 tons in India's bullion market. Also, fears of a hike in GST rates on bullion metals from 3% currently to 12% has gripped the markets since the government is unlikely to let go of the revenue. Smugglers defeated
Bullion market went into a tizzy on Tuesday as Finance Minister Nirmala Sitharaman slashed import duty on Gold and Silver to just 6 percent from 15 percent - the most unexpected move by the government. Banks that have lent money to bullion traders and jewelers against the inventory of gold and silver started making margin calls as soon as FM announced the sharp cut in duty. Customs duty is embedded in the price of Indian gold and silver (since it is imported) and banks are allowed to lend up to 75 percent of money on the full value of metals deposited with them. When prices go down, the borrowers have to pay a proportionate amount of money to the banks to maintain their margins at 75 percent.
On the Multi Commodity Exchange (MCX), gold futures prices declined by around 6 percent on Tuesday and the fall in cash markets could be a little higher, which means borrowers had to bring 5-7% of margin money to fund their borrowings. Industry insiders told Businessworld that there is an inventory of an estimated 300 tons of bullion metal, which at the current price comes to around Rs 1.5 lakh crore to Rs 1.8 lakh crores. Taking most conservative estimates, even if one considers that inventory worth around Rs 1 lakh crore has been pledged, then margin calls of around Rs 5,000 crores to Rs 6,000 crores may have been triggered due to the fall in price of the pledged inventory, industry experts say.
Insider view is that margin pledging in gold and silver has been high, since there has been no big volatility in their price and they have witnessed constant upward movement for the past couple of years. It is this reason that banks see less risk in accepting gold and silver as collateral.
Another interesting aspect is that when borrowers approach the banks to get their pledge released, they will have to pay the lenders considering 15 percent duty on the metals and it is only then the banks will consider releasing their collateral - a double whammy. Therefore on Tuesday when the share price of bullion companies and jewelers rose in the stock markets, analysts who understand the nuances of the market believed that the gains could be short lived.
By slashing the customs duty on bullions, the government has defeated the smuggling mafia since there is no viability left in their trade any more. For several years, smuggling of gold and silver was a high stakes game as 15 percent duty ensured higher margins to them.
GST Hike Fears
Government is likely to lose around Rs 40,000 crore in revenues by bringing down the duty on bullion metals, which can directly benefit the bullion dealers and jewelers on their sales. Hence, it is believed that the government will hike the applicable rate of GST tax on gold and silver to 12 percent from the current 3 percent, which will balance government revenues. In fact, by reducing the customs duty and hiking GST on it, the government has killed smuggling and plugged tax evasion. GST evasion is highly impossible on bullion metals and the move will curb any unaccounted sale of goods in the country.
Earlier 15 percent customs duty on gold and silver and 3 percent GST made the effective tax at 18 percent on the metals. Now the government is expected to make GST 12 percent with customs duty at 6 percent to yet again bring the effective tax rate to 18 percent.
Scandal Allegations Put To Rest
In the past few weeks, there was a massive hue and cry by the opposition parties due to the increase in import of silver via India's offshore business hub GIFT (Gujarat International Finance Tec-City) under the India-UAE tax pact. The tax agreement, which was a government to government reciprocal deal, allowed for import of silver at 8 percent from UAE even when the customs duty for imports from other countries was 15 percent. This had given ammunition to the detractors of PM Modi to allege a big silver imports scandal via GIFT City as import of the metal from there shot up in the past couple of months. But now with duty slashed to 6 percent, the FM has left no scope for the opposition to make any allegations since those who imported silver at 8 percent via GIFT would be at a loss.
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The writer is author of the book: The Market Mafia - Chronicle of India’s High-Tech Stock Market Scandal & The Cabal That Went Scot-Free.
Palak has been a journalist in Mumbai for nearly two decades now. He has worked for most premier pink papers including The Economic Times, Business Standard and The Financial Express and The Hindu Business Line. He was drawn to crime reporting at the age of 19 but a few years in the field told him that the fabric of crime had changed and the organised gangs, as Mumbai had witnessed during the eighties, no longer existed. It was business and markets that dominated the scenario. His passion to unravel the intricacies of the ‘white money’ economy led Palak to the world of finance and regulations.
