The Finance Bill 2023 proposes to amend income tax law to exempt gold conversion to an electronic gold receipt (EGR) and vice versa from taxation (transfers and capital gains).
As a result, clauses 3, 21, and 23 of the Finance Bill 2023 propose to amend Sections 2(42A), 47, and 49 of the Income Tax Act, 1961.
1. In response to the announcement in the Union Budget 2021–22 regarding the Gold Exchange, SEBI has been designated as the regulator of the proposed gold exchange’s entire ecosystem. As a result, SEBI has issued a detailed regulatory framework for spot gold trading on existing stock exchanges via the instrument of electronic gold receipts (EGR).
2. To promote the concept of electronic gold, it is proposed to exclude the conversion of physical gold into EGR and vice versa by a SEBI-registered vault manager from the definition of “transfer” for the purposes of calculating capital gains under Section 2(47) of the Income Tax Act.
3. It is also proposed that the cost of acquiring the EGR for the purpose of computing capital gains be deemed to be the cost of gold in the hands of the person in whose name the Electronic Gold Receipt is issued and that the holding period for the purpose of computing capital gains include the period in which gold was held by the assessee prior to its conversion into EGR. A provision for gold-to-EGR conversion is also proposed.
4. The following amendments are proposed for the aforementioned changes:
i) To include a new provision in Section 47 of the Income Tax Act stating that any transfer of a capital asset, such as physical gold, to an electronic gold receipt issued by a vault manager, or such an electronic gold receipt to physical gold, shall not be considered a “transfer.”
ii) For the purposes of this newly inserted clause, the terms “electronic gold receipt” and “vault manager” shall have the meanings assigned to them in clauses (h) and (l) of Regulation 2(1) of the SEBI (Vault Managers) Regulations, 2021, respectively.
iii. To insert a new sub-section (10) to Section 49 of the Income Tax Act to provide that where an electronic gold receipt issued by a vault manager becomes the property of the person as consideration of a transfer, as referred to in the new clause in Section 47 (to be inserted), the cost of acquisition of the asset for the purpose of the said transfer shall be deemed to be the cost of gold in the hands of the person in whose name the electronic gold receipt is issued.
Similarly, where the gold released against an electronic gold receipt became the person’s property as consideration for a transfer, as referred to in the new clause in Section 47 (to be inserted), the cost of acquisition of the asset (being gold) for the purposes of the said transfer is deemed to be the cost of the electronic gold receipt in such a person’s hands.
iv) To include a new clause (hi) in Explanation 1 to Section 2(42A) of the Income Tax Act stating that the holding period for capital gain purposes shall include the period in which the assessee held the gold prior to conversion into the electronic gold receipt.
v) Similarly, the holding period for the purpose of calculating capital gain shall include the period for which the electronic gold receipt was held by the assessee prior to conversion into gold.
5. These amendments will become effective on April 1, 2024, and will apply to the assessment years 2024–25 and onward.