[Economy] Excise Duty on Gold in Budget 2012: Reasons and Implications, Why Jewelers are protesting?

In Z-Miscellaneous by Support Staff

In the union budget 2012, government increased the tax on gold jewelry, and the Jewelers all over India have gone on strike.
They’re agitating and protesting and demanding for the withdrawal of these taxes.

  1. Budget provision
  2. TDS@Source
  3. Rupee weakens due to Gold obsession
  4. Why Indians consume Gold?
  5. #1: Financial Inclusion
  6. #2: Safe and Liquid Asset
  7. Better return on investment
  8. Profit Margin
  9. Gold Smuggling
  10. Epilogue

Budget provision

Pranab: (announcing budget in parliament)

  • Jewelers will have to pay 4% import duty on gold, earlier they had to pay only 2%.
  • Aam-Aadmi will have to pay 1 percent excise duty on non-branded gold jewelry
  • If Aam-Aadmi purchases jewelry worth more than 2 lakh rupees, the Jeweler will have to collect 1% tax from him in TDS (tax deduction @Source=Just like in Vodafone case.)

TDS@Source

Jeweler: but TDS form requires PAN card number. In a population of 120 crores, barely 12 crore people got PAN cards! How am I supposed to proceed with the paperwork?Pranab: can’t you see? it is a move to make people get PAN cards. If everyone has PAN cards then it is easy to track the tax evasion and black money. So  If a person is genuine and has the ‘aukaat’ (औकात) to purchase gold worth 2 lakhs, then he shouldn’t fear and get himself a PAN cardJeweler: agreed but what’s so magical about the lower limit of 2 lakh? Why not 1 lakh why not 1.5 lakh but 2 lakhs only?Pranab: because Most of the black money is routed through gold bars. A normal bar weighs 100 gram or more, and costs more than 2.5 lakhs. So, if customer has to pay tax and quote his PAN card number, the badman with blackmoney will think twice before making a purchase.

Hawalaa operator: but which fool is going to buy gold worth 2 lakh rupees in one go from one shop? He’ll just buy the smaller gold bars of 1 lakh rupees each, from 2 different jewelry shops. Yes, Necessity is the mother of all inventions!
Too bad you Stephenian and JNU-walla ministers and bureaucrats always underestimate the wisdom, might and finesse of a highschool dropout Hawalaa operatorwhile making your economic policies.

Pranab: Ya agree but it’ll create some inconvenience and reduce the gold purchase by a small percentage.

  • And Our end goal is to have compulsory PAN card and TDS for gold purchase of any price: whether it is 2 thousand rupees or 2 lakh rupees. Only then black money can be stopped from going into gold purchase.
  • But as you know, majority of junta doesn’t have PAN cards so if I announce TDS on gold purchase of 2,000 rupees right now, it’ll be totally impractical and create uproar in the country.
  • That’s why, we’ll do it in a phased manner: 2 lakh this year, 1 lakh next year, 50 thousands in third year and so on.
  • By that time majority of people will get PAN card as I’ll order the Income tax dept. to launch major drive to register everyone for PAN cards.

Jeweler: Do one thing at a time yaar. Either you ask everyone to get a UID card or PAN card. Why this overlapping and double labour, it is wastage of tax payer’s money, isn’t it?

Pranab: umm….

Jeweler: anyways I’m still not getting the logic. If black money is the problem, why don’t you fix the root of the problem- corruption itself, rather than doing firefighting by this gold-buy-pan-card thing? What about the Lokpal, Whitepaper on blackmoney and Swiss money reports and…

Pranab: well ummm…ammm…hmmmm…

Rupee weakens due to Gold obsession

Mohan (intervenes): Indian juntaa is the largest consumer of Gold in the world. In 2011 we imported almost 1000 tonnes of gold worth almost 50 billion dollars.

  • Dubai/South Africa’s dealer doesn’t Export gold bars for rupees, he demands payment in dollars.
  • Don’t you get it? Whenever you purchase gold, our rupee weakens in the forex market! When rupee’s value declines, we’ve to pay more money to import crude oil= petrol/dieasel expensive= milk and vegetables delivered via trucks and rickshaws also become expensive! Your gold obsession is increasing the inflation.
  • We’ve to reduce the gold consumption in India.

Why Indians consume Gold?

Jeweler: but why is Indian juntaa consuming so much gold in the first place? More people are getting married or what?
Mohan: Because bad people prefer to convert their blackmoney into gold bars. Other reasons for gold-consumption are following

#1: Financial Inclusion

  • Because good people in rural and Naxal affected areas, don’t have access to banks. So where can they put with their savings? ofcourse we could improve the law and order situation and public amnesties (water, electricity and roads) atleast upto Tehsil level so atleast some of the doctors, bank officers and teachers go and serve in those backward areas, but why bother.
  • Besides these lower middle-class and poor peolpe don’t have PAN cards so they cannot invest in mutual funds or sharemarket. And even if they were forcibly given PAN cards, they don’t know the technical knowledge required to invest in sharemarket. So where can they invest money except buying gold or land?

#2: Safe and Liquid Asset

  • Gold is a liquid asset, meaning it can be sold quite quickly and easily. Hence poor people like it. Besides, given the rise of NBFC Gold Loan Companies like Muthoot Finance (Akshay Kumar)- they give quick loans in lieu of gold and their target customer base is poor and lower middle class people.
  • So those people definitely think it is wiser to save in gold to get loans in emergency.

#3:Better return on investment

  • Banks gives you about 7% interest rate on your savings account while inflation rate is about 8%. What does it mean? Your bank account is not earning enough money to counter the effect of inflation. In fact you’re paying invisible 1% inflation tax by depositing your money in banks.
  • Ofcourse SBI could pay your higher interest rate had they not been wasting their money on Vijay Mallya or 2G telecom players. But that’s a different story altogather. The point is: banks are not giving you enough cash to fight inflation.
  • So even urban people think it is better to save now in gold, and sell it later to earn some profit, especially in the times of global financial crisis, when share market isn’t giving attractive return on investment.

Jeweler: wow man how do you know all this?
Mohan: Because I’m a good economist.
Jeweler: Then why don’t you do something to fix it?

Mohan: Because I’m not a good prime-minister.

  • Fiscal policy= what Government does to control economy.
  • Monetary policy= what RBI does to control the economy.
  • When people buy gold, they’re showing disrespect to my fiscal policy and RBI’s monetary policy.
  • When people buy gold- they’re suggesting that we’ve failed in curbing the inflation. So gold is my enemy #1.
  • I must stop the consumption of gold, instead of stopping the cause behind the consumption of gold i.e. inflation and blackmoney.

Profit Margin

Mohan: btw, enough talking about me, let’s now talk about you. Why are you bothered with this taxation, we all know that the company or merchant doesn’t pay out of his pocket. The taxes are ultimately Bourne by the final consumer!Jeweler: ya but the gold prices have increased so high, demand is already decreased. We’ve to hire so many film-actresses in advertisement.

  • Price difference of 10 gm gold pre-budget and post-budget is already Rs.1,500.
  • I’m afraid if I pass the taxes to final consumer, by increasing MRP of gold, it’ll further reduce the demand of gold-jeweler.
  • Hence, for a while I’ll have to bear a part of this taxation burden, by reducing my profit margin and keeping the MRP almost the same as usual, else I’ll lose customers, and that’s why I’m agitating and demanding the withdrawal of this tax.

Mohan: but that’d means I’ll succeed in my goal of reducing the gold demand in India!

Gold Smuggling

Hawala operator: Not so fast mister! Consider this:

  • For every kg of gold imported, the jeweler will have to Rs 1.10 lakh as duties as per the current prices.
  • but if he smuggles the gold from Dubai, and even if the return ticket costs Rs.20,000, he will easily save 90,000 in tax! (90k+20k=1.10lakh)
  • In the same way, on purchasing 5 kg gold, people will save upto Rs 5 lakh.
  • In short, your stupid tax policy on gold, will only increase smuggling.

Dawood: Hey I started my career doing the same thing! Smuggling of silver bars and gold watches in the 80s :P Who knows History may repeat itself and you’d see another Dawood Jr!
ISI: Whaat an Idea Sir-ji!

Epiloge

Mohan’s son is preparing for CSAT, IBPS, State PSC or Group discussion /Personal interview of MBA admission
Mohan’s Son (loudly reading the same sentence repeatedly from a note)

  • India, the world’s largest consumer of gold, imported 967 tonnes of the precious metal in 2011.
  • India, the world’s largest consumer of gold, imported 967 tonnes of the precious metal in 2011.
  • India, the world’s largest consumer of gold, imported 967 tonnes of the precious metal in 2011.
  • India, the world’s largest consumer of gold, imported 967 tonnes of the precious metal in 2011.

Mohan (to his son): What are you doing Betaa?
Betaa: Daddy I’m trying to verbatimly mugup the sentence written in this ready made coaching class notes/book.
Mohan: But WHY?
Betaa: Because I’m yet to hit the puberty, so I’m still under the impression that they’ll ask absolute fact/data/number/date based question and one can really score well in the exam by copy pasting the lines in a verbatim fashion just like in the board exams! Afterall economy is not about evaluating the implications of a policy or decision, but it is about just mechnical memorization of Tax rates in Budget, GDP, GNP, weekly Repo, CPI,WPI and Food inflation rates!!