Transaction tax

Legality of E-Gold and Gold Stock Exchange

Gold has been used as a medium of exchange since ancient times. In fact, at some point most countries pegged the value of their currency to a specific amount of gold as part of the Classic gold standard. All over the world, the the liquidity of gold is comparable to that of financial securities and therefore, it is a very important asset from an investment point of view. With this in mind, the last frame of the Securities and Exchange Board of India (SEBI) represents a major breakthrough in the financial market. This article will mainly explain the contemporary discourse around the legality of electronic gold (E-gold) that has arisen due to the said framework.

What is SEBI Gold Exchange Framework 2021?

SEBI, in his September 28 Board of Directors this year approved the Gold Exchange and SEBI (Vault Managers) Regulations Framework, 2021. This decision came after the Minister of Finance mentioned the intention to establish the same in his 2021-22 Budget Speech. This means that investors and ordinary people will now be able to buy gold online in the form of digital receipts. In simpler terms, people can now own gold in electronic form as opposed to physical gold. These instruments will be referred to as Electronic Gold Receipts (EGR) and will be referred to as “securities” under the Securities Contracts (Regulation) Act 1956. These EGR will be convertible into real gold according to the wishes of their holder. An EGR holder can continue to keep it as long as they wish because it is “perpetually valid”. The Council also issued a consultation document on Gold Exchange and SEBI (Vault Managers) Regulations, 2021. It intends to establish a system for exchanges across the country to launch gold exchanges.

Operation of EGR

The 2021 SEBI (Vault Managers) Regulations will incorporate a body called “Vault Manager” and will be regulated as a SEBI intermediary. Any registered legal entity with a minimum net worth of 50 Crore can apply for registration as a vault manager. They will perform tasks such as accepting deposits, creating EGR, and storing, safekeeping, and withdrawing gold.

Anyone who wants to convert their gold into a digital receipt can go to a vault manager and deposit the gold. After that, Vault Managers will perform a quality check and issue them an EGR. Each vault manager can decide on the denominations in which they wish to offer EGR, after approval by SEBI. Primarily, EGRs will be given in 1kg, 100g or 50g denominations, and smaller 10g and 5g denominations may also be approved. These EGRs will be eligible for purchase and sale on the stock exchange like regular shares of listed companies. They will be treated as securities for all purposes from the point of view of investors. EGR can be converted back to physical gold when issuing receipts to Vault Managers. Additionally, SEBI intends to make EGRs fungible, in the sense that a receipt issued by a particular vault manager can be redeemed by another.

Pre-existing gold trading system

Buying gold from jewelers is the most common method of “investing” in gold. Apart from this, gold trading in India could only be done by investing in Gold ETFs (Exchange Traded Funds) and gold futures. ETF is a commodity-based mutual fund that is used to invest in assets, including gold. These funds are represented by assets, but not in a dematerialized form (only on paper). ETFs are invested like stocks and when traded, investors receive equivalent amounts in cash instead of gold. Gold Futures Contracts, on the other hand, are forward-looking contracts to buy gold at currently determined prices. The contract is executed on a future date decided by the parties when the buyer pays the predetermined amount and the seller delivers the gold. However, these provisions work on the simple value of gold and not on the actual metal.

Importance of gold exchange

SEBI’s main objective of introducing gold exchanges in India was to create more transparency in the spot price of gold. Unlike gold futures, a gold exchange would focus on price discovery, creating a lucrative ecosystem for the physical market. A NITI Aayog Report showed that these gold exchanges make the market more efficient by centrally presenting demand and supply information to everyone. This would ultimately help reduce imports from other countries. Given India’s market and the auspicious value of gold, this improve accessibility for small buyers while increasing the liquidity of the metal. This would keep the price of gold under control and attract more buyers. The gold trading system exists in many other jurisdictions like the United States, London, and China. The most striking is the Shanghai Gold Exchange (SGE) because China is the largest consumer of gold in the world. Therefore, experts believe that a the parallel can be drawn between the success of the gold exchange in China and that of India.


As SEBI has asked for people’s suggestions and input, it is only speculation on how EGR will be taxed in India. Undoubtedly, the Securities Transaction Tax (STT) would be applicable on EGR. STTs are levied on trades made on stock exchanges listed in India. The main concerns stem from experts deliberating on whether Goods and Services Tax (GST) would be charged on gold exchange transactions. Article 2(52) of the CGST law explicitly excludes securities from the definition of “Goods”. Since EGR are in the nature of securities, they should also be excluded from the scope of “Goods”. However, a withdrawal transaction, where a person gives up their EGR to get gold in exchange, could have different implications. In this case, gold would be considered a commodity. These are the disputes that will be resolved once a project has been set by SEBI. SEBI asked for public comment, which made investors more optimistic about their future interests.