This article is written by Sahil Aggarwal, currently pursuing B.A.LLB. (Hons) from NALSAR University of Law, Hyderabad. This article explores everything about the background and relevance of the Gold Bonds (Immunities and Exemptions) Act, 1993.

Introduction

‘Gold’ has always been an important factor in the consideration of the Indian economy. It has been important for religious purposes, family heirloom, status symbol but its growth as a crucial investment instrument for the populace has been acknowledged by economists and policymakers significantly. Thus, post-Independent India has seen numerous schemes introduced by the Centre to curb or control gold circulation in the country with different objectives. One of these policies manifested in the form of the Gold Bonds (Immunities and Exemptions) Act, 1993. This article explores all about the background and relevance of this act.

Definition

The ‘gold bonds’ are issued periodically by the Reserve Bank of India and are sold through various banking channels including post offices and other authorized agents. These bonds are denominated in grams of gold and the price of the gold bond issued is determined at the time of each tranche based on average price. The price is set by the Reserve bank of India, which is normally slightly lower than the prevailing market price. The purpose behind this is to make the bonds attractive to the buyers in the market. Additionally, the bonds are denominated in grams of gold so that the actual holding does not change. However, the changes come in the value of the gold bond holdings of the buyer as that fluctuates with the market price of gold. In other words, it is similar to holding physical gold and participating in the price movement without the trouble of storage and conversion of form.

Background of the Gold Bonds Act, 1993

During the balance of payments crisis of 1991, the Government of India received many suggestions on bolstering the country’s foreign exchange reserves, including issuing gold bonds to the local investors and Non-resident Indians (NRIs). However, it was only after India was required to sell 20 tonnes of gold with an option of repurchase to the Union Bank of Switzerland in May 1991 to raise $200 million and another shipping of gold to the Bank of England to raise $405 million in July 1991, that the Ministry of Finance in India moved on the front of gold mobilization. This was done primarily for the purpose to provide the necessary boost to foreign exchange reserves. Perhaps, this also implies that gold reserves were as good and necessary as foreign currency reserves and could be employed for meeting short external payment gaps as well as investing in economic growth. By that time, the Reserve Bank of India had revalued its gold assets to make them parallel to the global prices of gold and shifted to valuing them at market rates consistently.

Once foreign exchange reserves started strengthening with the greater capital inflows after the liberalization and opening up of the economy in 1991-1992, the Central government and the Reserve Bank of India decided to increase the level of gold reserves too. Accordingly, the Government decided to launch a gold bond scheme in March 1993 and issued an ordinance governing such scheme. The Central Government ordinance provided for the scheme under sub-section (1) of Section 3 of the Gold Bonds (Immunities and Exemptions) Ordinance, 1993. The Gold Bonds Scheme 1993 finally came into force on 15 March 1993. The scheme was introduced with a purpose to mobilize the idle gold resources from the populace to supplement the official reserves.

Before this Scheme of 1993, the Government of India had issued 15-year gold bonds at 6.5 per cent simple interest in November 1962 to meet the expenses or arms and support services against the Chinese invasion. The authorities could mobilize 16.3 tonnes of gold as a result. However, again in March 1965, a new series of gold bonds at 7 per cent interest with the maturity period of 15 years was issued to mop up the unaccounted money and the authorities got 6.1 tonnes of gold. Therefore, the government of India issued the scheme of National Defence Gold Bonds in October 1965 providing 6.5 per cent interest and a 15-year maturity period. The authorities received 13.7 tonnes of gold as a result of this. Unlike the other two bonds which were repayable in rupees based on the international price of gold, this one was redeemable in gold of standard purity at maturity.

Later on, under the Gold Bond scheme of 1993, which opened for subscription on March 15, 1993, and closed on June 14, 1993, investors could get a subscription by providing a minimum of 500gm of gold that had to be melted later with no limit on investment. In return for subscribing to this five years scheme, the investor was to be given a lump sum interest of Rs. 40 for each gram of the gold deposited. Under this scheme, the subscribers were repaid in the form of gold of 0.995 fineness, after the 5 years of the date of issue.

 The government managed to mobilize a little over 41 tonnes of gold, then valued at Rs. 1807 crores because the scheme offered immunity to the investors from being asked questions as to the nature and source of acquisition of the Gold offered and the source of money with which the gold was acquired. Moreover, the scheme also granted certain other immunities to the initial subscribers under the Wealth Tax Act of 1957, the Gift Tax Act of 1958, the Income Tax Act of 1961, the Customs Act of 1962, the Foreign Exchange Regulation Act of 1973, and the Foreign Contributions Regulation Act of 1976. The gold deposited by the investors was assayed and investors were provided a certificate. 

The 41 tonnes of gold mobilized by the Reserve Bank of India in 1993 boosted its holdings to 400 tonnes by early 1994, prompting the central bank to consider earning an income by its growing gold reserve. Most importantly, by April of 1993, the said ordinance was repealed by the Gold Bonds (Immunities and Exemptions) Act, 1993 under its Section 6.

Summary of the Act

The Gold Bonds (Immunities and Exemptions) Act,1993 was enacted by Parliament in the 44th year of the Republic of India which came into force on the 31st January 1993 as per Section 1 of the Act. Again, the Act provided the subscribers of Gold Bonds with certain immunities and they were also exempted from the direct taxes with regard to such subscribed bonds and any matters connected thereto. 

The Act was enacted to assemble the indolent gold resources of the inhabitants in India. Such residents were consequently provided with some immunities and exemptions to motivate them to contribute to such Gold Bonds.

Section 2 of the Act lays down the definitions of various terms like Gold Bonds, subscribers, etc in the context of the Act. Under Section 2(a), Gold Bonds are defined as the Gold Bonds 1998 issued by the Central Government along the lines of the Gold Bond Scheme of 1993.  Simultaneously, Section 2(b) provides that a subscriber who has initially subscribed to the Gold Bonds can be an individual, a company or a firm, trustees of a trust, a Hindu undivided family, but they should in every case be a resident of or an entity in India. The explanation appended to Section 2 provides that the term ‘individual’ has to include all the legal heirs and all the members of the Hindu undivided family who have a share in the Gold Bond after the partition has taken place.  All other words and expressions used under this Act but not defined under this act were to have the same meaning respectively as they were defined under the Income Tax Act 1961.

Section 3 of the Act provides the Gold Bonds Scheme. It mentioned that by notification in the Official Gazette, the Central Government could frame a scheme for subscription to the Gold Bonds 1998 which could be done on or after the commencement of the Gold Bonds Act, but it should be framed before a specified date. Under the explanation appended to it, the Section also provides that the “specified date” meant the date of 31 March 1993.  While the Central Government could also notify in the Official Gazette any other later date on this behalf. As per Section 3(2), the scheme was required to be presented before each House of Parliament as soon as it was framed.

Subsection 1 of Section 4 of the Act is a non-obstante clause which mentions about the immunities and explains that despite anything stated in the Wealth-tax Act, 1957, the Income-tax Act, 1961, the Foreign Exchange Regulation Act, 1973, the Gift-tax Act, 1958, the Customs Act, 1962, and the Foreign Contribution (Regulation) Act, 1976, no subscriber who has subscribed for the Gold Bonds should be required to disclose the nature and basis of acquiring such gold including the source of the money through which the gold was acquired. Clause (b) of the same section provides that no subscriber would be investigated under the above-said Acts just on the ground that the person owns a gold bond. Clause (c) states that the fact that a subscriber owns a Gold Bond should not be admissible as evidence in any actions or proceedings against him or her under the above-mentioned Acts.

Under the proviso to the same section, however, one exception to the aforementioned clauses is that prior to the commencement of this Act if any proceedings had already been initiated concerning the gold subscribed by the subscriber, then anything contained in this section would not apply to any such proceedings.  Sub-section (2) provides that Sub-section 1 of Section 4 would not apply in relation to any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code (45 of 1860), the Terrorist and Disruptive Activities (Prevention) Act, 1987 (28 of 1987), the Narcotic Drugs and Psychotropic Substances Act, 1985 (61 of 1985), the Prevention of Corruption Act, 1988 (49 of 1988) or for the implementation of any of the civil liability.

Section 5 explains certain cases where Gold Bonds cannot be considered for tax purposes. Subclause “a” of the Section says that the provisions of the Income-tax Act, 1961 would not apply to any interest accruing from the Gold Bonds to the subscriber.  Also, if the subscriber had any long-term capital gains then also these provisions would not apply. Under clause (b) of the same section, it is provided that when a subscriber gifts a gold bond to an individual to his or her spouse, child, or parent, the provisions of the Gift Tax Act, 1958 would not apply.

Following this, the Government of India launched a gold deposit scheme in 1999, that was formulated to attract the institutions such as the Tirupati Devasthanam and other large temple trusts all over India with large stockpiles of gold to deposit their gold. However, the scheme failed with very few investors opting for that. By then, the government couldn’t offer an amnesty scheme because of the strictures from the Supreme Court after the famous Voluntary Disclosure of Income Scheme (VDIS).

Conclusion

Even after the implementation of the Act, the percentage of gold reserves in the Reserve Bank of India’s total reserves had declined from the mid-1990s. It constituted 20% of the reserves in 1994 which dropped to 2.98 % by end-September 2008. Reserve Bank of India, later bought 200 tonnes of gold from the International Monetary Fund (IMF) in November 2009, following which the share of the metal in the total reserves rose above 8%. The Government’s attempt in 1999 for the Gold Deposit Scheme also failed to garner a positive response from the general public. The scheme was aimed at reducing the gold import bill and utilizing the idle private gold. In India, it is important to note that most investors invest in gold in the form of jewellery which involves various constraints, that includes high making charges, loss of value, safety issues, and storage/locker charges. Perhaps, that is why it is important to create awareness among investors for investing in various forms of much safer gold investment.

References

• https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/7948.pdf
• https://shodhganga.inflibnet.ac.in/bitstream/10603/115713/9/09_chapter%203.pdf