22 - 28 March 2001
Issue No.526
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Al-Ahram Weekly On-line 22 - 28 March 2001 Issue No.526 |
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| Published in Cairo by AL-AHRAM established in 1875 | Current issue | Previous issue | Site map | ||
Gold's fading glitter
Sherine Nasr takes a look into how the high sales tax levied on gold commodities has contributed to the slump in the gold market
Traditionally a high season for gold sales due to celebrations of a number of religious and social occasions, the past two months have surprisingly witnessed a downturn in the gold market. There is almost unanimous agreement among gold traders that conflicting rumours concerning the possible removal of sales taxes on gold products have caused stagnation in the market. The rumours that had spread at the year's start of an abolishment of the sales tax had caused merchants to delay their trade operations until they could properly assess their projected profits when the final word is out. The rumours later proved to be unfounded.
"It was only natural that such rumours would affect the market," said Khairi Aziz, a gold trader. He said that a 22 per cent reduction in sales taxes at the beginning of 2000, from 100 to 80 piastres per one gram of gold, led traders to expect a similar reduction at the same time in 2001.
The elimination of the sales tax on gold items was firmly ruled out by Nasr Abul-Abbas, an accountant and tax expert. "It is true that gold traders have been fighting relentlessly against this tax, which they believe to be unfair. Yet, as far as the government is concerned, no serious action has been taken in support of this stance," Abul-Abbas said.
Yet, the decline in the gold market can be attributed to other factors as well, both local and international. The sudden rise in the dollar versus the pound in the last quarter of 2000 negatively impacted gold trading. The Egyptian gold market also faces fierce competition from some neighbouring countries -- specifically Gulf region countries, such as the United Arab Emirates -- where better quality gold commodities are sold at more reasonable prices due to the absence of excessive taxes and fees on gold there.
Meanwhile, most experts believe that the imposition of the sales tax on gold products in 1991 marked the beginning of a phase characterised by almost uncontrolled commercial fraud in this vital market.
"It is true that since the application of this tax, cases of commercial fraud have dramatically increased," confirmed Hamdi El-Malawani, head of the Stamping Authority.
The100-piastre sales tax originally imposed by the government on each gram of gold was considered ridiculously inflated by all gold manufacturers. "This rate is actually double the profit that both the manufacturer and the trader can make," commented Aziz. As a result, many manufacturers resorted to faking the authority's official stamp on gold to evade paying both the stamping fees -- estimated at 20 piastres per gram -- as well as the sales tax. "To maximise profit, these manufacturers falsified the carat of their gold in order to be able to cheat consumers and sell them items that contain less gold metal for the price of high-carat gold," said Aziz.
A look at the investigations into the market conducted by the Supply Police during the past two years supports this point.
In 1999, a total of 1,839 investigations were conducted in which 1,758 cases of commercial fraud were discovered. In 2000, the supply police carried out some 1,841 investigations, with 1,540 cases of fraud proven.
So, how did counterfeiters obtain the original stamps which they used to fake the carats of gold? One gold trader, who requested anonymity, argued, "Cases of commercial fraud in the gold market have become so widespread that the trustworthiness of gold inspectors has to be questioned."
Pressing El-Malawani on this allegation, he retorted, "It is impossible that gold inspectors would side with those outlaws." He explained that gold inspectors work under the strict supervision of the Administrative Control Authority and the Public Fund Prosecution. Therefore, the notion of cooperating with fakers is far-fetched.
El-Malawani further claimed that cases of stamp faking can hardly be referred to as a phenomenon. "These cases are estimated to involve 10 per cent of the total volume of gold items in the market." El-Malawani said that in 1999, the authority stamped 79,486 kilograms of gold of all carats, while in 2000, a total of 76,384 kilograms were stamped -- a slight drop compared to the year before.
However, reports show that the volume of gold traded on the market is almost triple the volume officially stamped by the authority. Samah Nabil, of the Cairo regional office of the World Gold Council (WGC), an international body with a mandate to promote gold manufacturing and trading worldwide, puts the actual total figure at 600,000 kilograms of gold at present.
"This means that most of the gold was stamped outside the jurisdiction of the authority," Nabil said.
In an effort to upgrade the Stamping Authority's gold testing techniques, the WGC donated two state-of-the-art machines designed to detect the carat of any gold item in a matter of seconds. The machines, costing $40,000 each, have been operating successfully in major gold-trading countries, such as Dubai, India and Switzerland. "Through x-ray, the machine can determine the correct carat of 40 items at once with an accuracy rate of 99.9 per cent," said Moa'z Barakat, director of the WGC Cairo office.
The new technique, however, is not being fully utilised. "It will take some time before these modern devices completely take over the traditional method of verifying the carat of gold items," said El-Malawani.
The government is currently seeking to toughen the punishment on cases of commercial fraud. At present, carat forgers are meted out a six-month imprisonment sentence. Faking the official stamp is considered a felony, punishable by a jail term of between three and 15 years.
"Harsher penalties is one way to correct the chaos in the gold market. Yet, unless the sales tax is abolished, cases of illegal stamping will continue to threaten the country's, as well as the customer's best interest," said tax expert Abul-Abbas.
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