MUMBAI: The recent change in gold and silver's duty structure from a flat to a value-based rate will create a host of problems for banks, which import the metals on consignment basis from overseas suppliers, where the prices are fixed not at the time of import but upon subsequent sales to jewellers, a few bankers said.
The major impact on banks, they said, would arise if prices change between the time of imports and the metals are priced. For example, a bank pays 2% of Rs 27,000 per 10 gm of gold, or Rs 540, to customs at an airport but may collect a duty of Rs 530, or Rs 10 less, if the price falls to Rs 26,500 a month later when it sells the gold to a jeweller. This could create a situation where banks may have to take a hit on their books.
This differential, added the bankers, will lead to variations in gold or silver prices on the market and each bank will have a different price, creating transparency issues in the market and for the trade. The banks will have to mark-to-market losses or gains on customs because of a change in international prices or currency fluctuations, since a stronger rupee makes gold cheaper for locals and vice versa.
The banks stand to gain if prices rise, making the changed duty structure like a sword that could cut both ways. However, Rajan Venkatesh, MD of ScotiaMocatta India, one of the country's leading bullion suppliers, said: "Banks are not here to make money on duty. Our business is to import gold and charge a fixed commission. I should be able to recover what I have paid to the government. We are not questioning the increase in duty and have no issues with that, as it remains the prerogative of the government."
Earlier, the duty on gold, including education cess, was a flat Rs 309 per 10 gm and Rs 1,500 per kg on silver. The government revised this to an ad valorem 2% on gold and 6% on silver with effect from January 17. According to a PSU banker, the government formula for fixing the duty is based on a notional rate of dollar-priced gold and the notional dollar-rupee rate during a given month. This duty would apply for the whole month.
However, he asked: "What happens if the bank is not able to sell the whole consignment during that month? What if the price falls in the next month? Will the bank have to sell the remaining part of the consignment at a lower duty? If so, this would not solve our problem."
Agreed Harshad Ajmera, proprietor of Kolkata-based JJ Gold House. "The value-based duty could become a sticking point in negotiations between the trade and banks for gold imports," he said. The PSU banker said that banks would shortly convey their grievances to the government through industry group, Indian Banks' Association.
The differential would also pose problems when gold is imported duty-free on behalf of exporters. In this case, the bank submits a bond to the customs, stating the value of imported gold. If, for some reason, an exporter fails to sell jewellery or bullion (made from gold imported duty-free) overseas or if the overseas buyer defaults on payment, the sale will be deemed as local one where duty has to be recovered from the exporter. Here again, the duty differential between the time of sale and consignment clearance by customs could queer the pitch for banks.
Source : economictimes.indiatimes.com