[Opinion] Pre-Budget 2023 – Correct the Gold Scheme Name

Authored by Meenakshi Subramaniam – Former IRS Officer

Table of Contents:

1. Section 47 viic

2. Why is it a Bloomer

3. Potential Risks

4. Section 48 (fourth proviso)

5. Go, Gold Gaffe

6. Summing Up

Lord Yama was upset. Chitragupta, the finest draftsman of the universe (after all he was writing deeds and misdeeds of everyone) had made mistakes. He had constantly spelt ‘Yama’ as ‘Yam’ in Budget (they too have a Budget) documents. The Lord learnt that an income tax official, who was part of Budget making exercise on earth had convinced Chitragupta that Yama should be spelt as Yam, as everybody calls the Lord as Yam, not Yama.

Budget 2023 should, as a priority measure, correct the drafting errors appearing in Sovereign Gold Bond scheme, outlined in Income Tax Act. The name of the popular gold offering appears as Sovereign Gold Bond Scheme 2015, throughout, in Income Tax Act. The truth is that it should be just “Sovereign Gold Bond Scheme,” without mention of any year. This is because the gold series are being issued every year, not just 2015.

1. Section 47 viic

This Section enumerates ‘Transactions not regarded as transfer’ and mentions:

(viic) any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual;

In this way, Section 47 still refers to the sovereign gold bond as being issued under the Sovereign Gold Bond Scheme, 2015. However, the government issues a new sovereign gold bond scheme every year under a series of tranches for a period of five days each.

Section 47 should be amended to remove the reference of any particular year from the sovereign gold bond scheme.

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2. Why is it a Bloomer?

The puzzling question is how can Sovereign Gold Bond of, say 2023 be issued under Sovereign Gold Bond Scheme of 2015 ? The drafting error is incredulous, if not downright nonsensical.

If it was a scheme, issued for one year, that is, 2015, the nomenclature would not be termed defective. But, every year, new Sovereign Gold Bond series are being brought out, in tranches after tranches.

The press releases may speak of Sovereign Gold Bond series like 2022 or 2023, but the fact remains that Income Tax Act continues to display the name as Sovereign Gold Bond, 2015.

3. Potential Risks

The first tranche was issued during 5-20 November, 2015, at an issue price of Rs. 2,684. The 2022-23-Series III opened for subscription during December 19-December 23, 2022 at an issue price of Rs 5,409 per gram. Now, what happens if 2015 price of Rs.2,684 is considered, denying tax benefit, available on higher Rs. 5,409.

Reference to a particular year, namely, 2015 would also create confusion and mistakes, for departmental officer and taxpayer, where latter would have to explain and prove the year all the time. This is because sovereign gold bonds are being issued, year after year, from as long as 8 years.

Fortunately, the interest of 2.5% given to Sovereign Gold Bond holder twice a year, is same, whether it be 2015 or any other year. It would continue to be taxed under “Income from Other Sources.” Also, thankfully, no TDS is charged on Sovereign Gold Bonds.

4. Section 48 (fourth proviso)

This section says that indexation shall not apply to the long-term capital gain arising from the transfer of a long-term capital asset, being a bond or debenture other than—

(a) capital indexed bonds issued by the Government; or

(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015

Therefore, an amendment is also required under the fourth proviso to section 48 which provides the benefit of indexation while computing long-term capital gain arising from the transfer of sovereign gold bonds. A person who takes exit option, before maturity of 8 years, gets long term capital gains at a rate of 20 percent after taking the advantage of indexation into account.

Potential Risks

Now, cost inflation index in 2016-17 was 264, but 331 in 2022-23, for calculating long-term capital gains. Hence, if Sovereign Gold Bond, 2015 is taken into account it would mean calculating at indexation of 254, instead of 331 and the taxpayer suffers a heavy loss. He would not get compensation for price rise or inflation.

As indexation benefit of earlier year is always lesser the taxpayer stands to lose, if the income tax officer takes 2015 as base year.

Now, wrong indexation would also affect set off provisions, which can be claimed by taxpayer. If due to indexation, a transfer of Sovereign Gold Bond result in a long term loss, such loss shall be allowed to be set off and carried forward in accordance with the provisions of the Act, as in the case of other long term losses. But, if incorrect indexation does not show loss, how can the taxpayer set off loss ?

There is another aspect too. The benefit of indexation is available to both, the original subscriber and a subsequent transferee of Sovereign Gold Bond. Therefore, the transferee would also stand to lose benefit of indexation, if it’s wrongly mentioned that the issue is Sovereign Gold Bond Scheme 2015.

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5. Go, Gold Gaffe

Indexation must be allowed to gold, properly. Gold always held to be extremely valuable must not be treated lightly in taxation. In Peerless General Finance and Investment v DCIT (76 ITR 356) there was a passing reference by Kolkata Tribunal to government securities like Sovereign Gold Bonds being entitled to indexation benefit. The Tribunal also relied on Sundaram Finance v ACIT (165 ITD 0563 ) where Chennai Tribunal ruled that government securities are entitled to indexation benefits. The CIT’s order that government securities should not get indexation was struck down.

The Budget is the right time to correct the gold scheme name. For example, the guidelines, to ensure that after fringe benefits are taxed in hands of employer, there will be no double taxation, was held to apply from FY 2004-5, whereas the correct year was FY2005-6. The error was rectified. Similarly, MAT in another budget was reduced from 18.5 % to 15% but was erroneously said to apply from fiscal 2021 whereas the correct fiscal 2019 was conveniently forgotten. The mistake was corrected.

6. Summing Up

Just removal of year from Sovereign Gold Bond Scheme in Section 47 (viic) and Section 48 (fourth proviso) would set thing right. It is time, the draftsman’s mistake be effaced.

Here’s a light story, at the end:

Two people, a doctor and an income tax law draftsman, once entered a writing competition. Now, the contest organizer couldn’t read one word of what both had written. As what doctors write can be read only by chemists, a pharmacist came to rescue. But, what the income tax law draftsman had written was not understood by anyone. This is because income tax law drafting can be understood only by the person who has drafted the section!