RBI moots tax sops for pledging gold

The Reserve Bank of India (RBI) on Wednesday put out a draft paper suggesting tax sops for pledging gold with banks and higher duties on import of the precious metal, aimed at containing the adverse effect of gold imports whose impact on current account deficit (CAD) soared to an all-time high.

In fact, gold import is a major constituent of the country's rising current account deficit (CAD) -- the difference between exports and imports after considering cash remittances and payment --  widened to a record high of 5.4 per cent of GDP, or $22.3 billion, in the July-September quarter, as per government data.

The draft report -- coinciding with the Finance Minister P Chidambaram's statement in New Delhi on Wednesday, that his government is contemplating steps to make gold imports more and more expensive -- was emphatic of a need to moderate the demand for gold imports.  "There is a need to moderate the impact on the current account deficit. Fiscal measures to reduce the gold imports may be revisited," it said.

Further, the RBI's report of the Working Group on gold also came out with large number of recommendations to deal with the rising gold imports. It suggested that banks need to design innovative financial instruments that can provide real returns to investors.
Recommending "introduction of tax incentives on instruments that can impound idle gold may be considered," the report said there is a need to convert both rural and urban demand for gold into investment in gold-backed financial instruments through dematerialisation of gold.

Gold loans have a causal impact on gold imports substantiating the emergence of a liquidity motive for holding gold, the report said. It also pointed out that international gold prices and exchange rate "significantly and positively" affect the gold prices in India.  

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