Why the gold scheme runs the risk of misuse by fake religious trusts

The minutiae of both the Gold Monetization Scheme(GMS) and gold bond scheme is at last out. The first tranche of investments in gold bonds will be accepted by designated banks and post offices from 5 November to 20 November 2015, with minimum investments being on bonds worth 2 grams of gold and maximum on bonds worth 500 grams. The value per gram at the point of investment would be Rs 2,684 per gram. Thus if I want to invest on bonds whose underlying assets are 10 grams of gold, I will have to fork out Rs 26,840. The bonds would have a lock in period of five years and would mature after eight years. But even during the lock in period, one can unlock his investments through the bourses. The interest payable would be 2.75 percent per annum, taxable all the way – income tax, wealth tax and capital gains tax. The bonds may prove to be a good or bad investment according as what exactly is the gold value on maturity – if gold has appreciated in the meanwhile one stands to gain but if it has in the meanwhile lost its luster, it would have been a bad investment of course in hindsight.[caption id=“attachment_2119695” align=“alignleft” width=“380”]  Is GMS vulnerable to misuse? Agency[/caption] GMS on the contrary bristles with exciting possibilities for those sitting on a treasure chest of gold and gold jewelry though the holders of jewelry may have to steel their hearts while their precious possession is melted. Even gold biscuits and coins would be melted to ascertain their true weight and purity but the heartburn would be much less vis-à-vis melting of jewelry. Be that as it may but as my co-columnist Dinesh Unnikrishnan points out the rate of interest of 2.25 percent per annum for gold deposited for five to seven-year duration and 2.5 percent for 12 to 15 year duration is indeed attractive vis-à-vis the hitherto niggardly rate of 0.75 to 1 percent. One wonders what would be the rate for deposits for 8 to 11 years. The rates indeed translate into a good return especially for those in the 30 percent income tax bracket given the fact that it would be income tax and wealth tax-free. While the attractive rates with tax exemption thrown in would entice people sitting on idle gold, housewives may still be allergic to melting for sentimental reasons even if they are assured that their investments are not going to melt away. And the other worry is taxman coming calling with tip off from banks, the fear that scuppered the earlier schemes. But GMS has success written all over it. Religious trusts like Tirumala Tirupati Devasthanams (TTD), Satya Sai Baba trust, Mata Vaishneo Devi Trust etc. are going to double their income from their existing investments and would therefore enthusiastically come forward with additional investments barring the quantity required for day to day use and which are fixtures like the gold gopurams of TTD and Srirangam temples. Wily individuals would soon start salivating. Here is how. Start trusts that ensure wholly for religious purposes. One’s own gold can be explained away as contributions by pious devotees and then can be invested under GMS. Section 115BBC of the income tax law says anonymous income of trusts above 5 percent of their receipts would be taxable at the rate of 30 percent but in a manner of double take exempts religious trusts from its clutches. The tax administration would have to gird its loins to deal with the mushrooming applications for the status of religious trusts. Those fearing pointed queries may hide behind benign and unctuous babas dotting the Indian landscape who may do the bidding of their powerful patrons with or without fees. In other words, black moneyed people who park a large chunk of their ill-gotten money in gold have two alternatives – if they are intrepid, they can float religious trusts and if they are less intrepid but can worm into the hearts of existing religious trusts, they can handover their gold for ‘safekeeping’ with them in a spirit of mutual back scratching.