Gold buyers will be required to pay a 10 per cent value-added tax if a proposal of the Viet Nam Association of Financial Investors (VAFI) is approved.

The proposal is one of several measures that the association has submitted to the Minister of Finance and the Governor of the State Bank of Viet Nam for consideration.

VAFI will curb the current hoarding of gold in the domestic economy, according to its chairman Quach Duc Phap.

Phap said speculators had been purchasing gold in order to raise the price and dominate the domestic market.

Gold fever has been occurring for two months but shows no sign of abating.

In late September, the global gold price fell from US$1,850 to $1,598 an ounce.

The domestic gold rate at that time was VND4 million ($190) higher than the global price per tael.

Many independent experts said the large gap was due to insufficient supplies of gold for rising local market demand.

To narrow the gap, the central bank on several occasions has granted permission to bullion traders to import more gold to ease the market's thirst for gold. However, domestic gold prices are still much higher than global rates.

According to VAFI's estimates, the country had to spend about $1 billion to import gold to satisfy the domestic market's demand in recent months.

This means that over VND20 trillion ($952 million) will be withdrawn from the domestic banking sector to buy gold, which was then kept in stock.

This situation had affected the country's foreign currency reserve and its capital sources for domestic production and trading activities, Phap said.

The central bank has been considering a plan to attract and use gold accumulated in domestic savings in order to bolster the nation's foreign-currency reserve.

In the past, banks had been able to access 130 tonnes of gold used as savings by Vietnamese.

On May 1, the SBV requested an end to gold lending and a gradual reduction in gold savings by May 1, 2013.

In order to take advantage of this untapped source of capital, the SBV is considering allowing banks to buy gold.

However, banks would not be allowed to provide lending in gold or convert gold into Vietnamese dong, but instead would have to deposit it at the central bank.

To do this, commercial banks may be allowed to issue bonds and bills in gold in a bid to increase gold deposits.

The SBV would borrow against gold reserves at commercial banks via Treasury bills.

It may exchange half of the gold saved to buy in order to boost the national foreign-currency reserve.

VAFI experts, however, said that the central bank's proposed measure would be extremely costly. There was no precedent for such action in other countries, they said.

Foreign currency sources for production and trading activities were currently being used in a scattered way, so it was easy for gold investors to monopolise the market with gold and foreign currencies to raise the price of gold when fluctuations took place at home and abroad, they said.

The SBV estimates that 300-500 tonnes of gold may be held in domestic savings, equivalent to VND600 trillion ($28.57 billion). This affects forex fluctuations, inflation and public psychology.

The public's buying and even speculating in gold was a legal practice, experts said.

The problem was that State administration agencies did not have full awareness of the impact of this situation.

So they had loosened control over the domestic market, thus causing instability on the domestic monetary market.

VAFI solutions

VAFI experts stressed the need for the central bank and the Ministry of Finance to develop effective measures to stop the hoarding of gold in the economy.

They suggested that the SBV and the Finance Ministry ban trading of gold and make the bank responsible for purchasing gold savings from people at global prices.

In addition, they recommended that the Finance Ministry should impose a 10 per cent value-added tax (VAT) on the purchase of bullion and gold jewellery.

To do this, the ministry should work with the central bank on gold management policies.

"If they agree to ban the purchase of gold sheets, the ministry must change its current tax calculations over gold jewellery trading activities by deducting 10 per cent VAT from the sale price.

"If the Finance Ministry does not agree with the measure to ban trading of bullion and jewelry, it should consider these products as common consumer commodities and impose a 10 per cent VAT on the sale of gold sheets and jewelry to the public," Phap said.

To encourage people to sell their gold savings, VAT would not be imposed when people sell their gold to State-run gold trading companies, he said.

According to VAFI, the prevention of gold hoarding as well as dollarisation is necessary to stabilise the foreign exchange market and attract trillions of dong from people's savings to invest in production and trading sectors.

These measures would also contribute to lowering the lending interest rate, thus supporting enterprises' production and trading activities, and contributing to the sustainable development of the gold and monetary market.

VNS