With a view to curbing demand for physical gold, the government today proposed to issue sovereign gold bonds, which may attract capital gains tax as is applicable to bars and coins.
The proposed scheme, which aims to shift part of the estimated 300 tones of physical gold bar purchased every year to demat gold bond, will be marketed through post offices and brokers on a commission basis.
Based on the current market price, issuance of gold bonds equivalent of 50 tonnes would be around Rs 13,500 crore, said a discussion paper on the scheme for which comments are invited till July 2.
"Since the amount is not very high, it can be accommodated within the market borrowing programme for 2015-16," it said.
As regards taxation, the draft said, capital gains tax treatment will be the same as for physical gold.
"This will ensure an investor is indifferent in terms of investing in these bonds and physical gold -- as far as the tax treatment is concerned. This is still under examination," it said.
The bonds will be issued in 2, 5, 10 grams of gold or other denominations, it said, adding that the tenor of the bond could be for a minimum of 5-7 years so that it would protect investors from medium-term volatility in gold prices.
"Since the bond will be part of the sovereign borrowing, these would need to be within the fiscal deficit target for 2015-16 and onwards," it said.
The bonds will be used as collateral for loans and the loan to value ratio will be set equal to ordinary gold loan mandated by RBI from time to time.
Earlier, in his Budget speech, Finance Minister Arun Jaitley had said: "Though stocks of gold in India are estimated to be over 20,000 tonnes, most of this gold is neither traded, nor monetised. I propose to... develop an alternative financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold."
As regards returns on such instruments, it said, "The government will issue bonds with a nominal rate of interest (which will be linked to international rate for gold borrowing)."
"An indicative lower limit of 2 per cent may be given, but the actual rate will have to be market determined. On maturity, the investor receives the equivalent of the face value of gold in rupee terms," it said.
The rate of interest on the bonds will be payable in terms of grams of gold, it said, adding that the interest will be 2 per cent or 3 per cent.
Such bonds will be issued by RBI on behalf of the government and the issuing agency will need to pay distribution costs and a sales commission to intermediate channels, to be reimbursed by the government, the paper said.
In order to ensure wide availability, the bonds will need to be marketed through post offices and by various brokers or agents who may need to be paid a commission (like for Kisan Vikas Patra).
Such bonds with a sovereign guarantee will be easily sold, traded on commodity exchanges. The Know Your Customer norms will be the same as that of gold.
Upside gains and downside risks will be with the investor, who need to be aware of the volatility in gold prices, it said, adding that the government would bear the risk of gold price movement on issuances.
India, the world's largest consumer of gold, imports around 800-900 tonnes of the metal annually, the second-biggest item after oil, leading to a substantial outflow of the foreign exchange.
Gold imports grew 10.47 per cent to USD 2.42 billion in May. During April-May, the first two months of the 2015-16 fiscal, trade deficit stood at USD 21.39 billion as against USD 21.32 billion in the same period last fiscal.