Customs, Gold and Cheating?!

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Allegedly, GOI has decreased the Custom duty on Gold, because there are repayments lined up for Sovereign Gold Bonds (SGBs).


The whole story -


GOI in 2015 came up with a new kind of Bond - the SGB, equivalent to real gold in terms of value, Capital Gain and even as collateral for loans.


Moreover 2.5-2.75% p.a. interest.

Cherry on the cake - No Capital Gains tax if held till maturity (8 Years).


Now, 8 years hence, it's time to repay the amount equivalent to the "present price of gold" to investors.


And.....GOI in the latest budget has decreased the Custom duty on Gold, which subsequently reduced the prices of Gold by 6%, which reduces the repayment to be made in respect of SGBs.



Jatin and I researched further about the same and calculated the potential benefit to the government in this FY.


Units sold in FY2017            1,13,87,765

Total Amt raised (In Crs.)           3,480.57 

 

Average Per Unit price               3,056.41 

Approx. Price Today                    7050.00

Approx. Price on July 22             7500.00

 

Est. Repayment today (INR Cr.)    8,028.37 

Est. Repayment on July 22, 2024    8,540.82 


Potential savings                              512.45 

% Savings                                             6%


Strangely this looks like a small savings because if the government is saving here, its income is also taking a hit by reduced customs duty.

(Note that, as per sources there are rumours of an increase in GST on Gold from 3% to 5%.)


There could be some other reasons as well for the move:

1. Decreasing Gap between Indian and other markets (Dubai...IYKYK)

2. Curb illegal smuggling of Gold in India.

3. Will also lower input costs, push domestic manufacturing and boost competitiveness in global markets.


This was the first instance in my investment journey, that my investments (in SGB) took a huge direct hit because of a policy change. This emphasizes the importance that every word of the budget speech marks.

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