Investment in Art – the hidden cost that hurts

August 26, 2009
4 mins read

What pinches is the value you actually pay above the final price of a work of art.

Let us for the moment ignore whether these are good times or bad times for buying art. Instead, let’s ask: What is the art you buy really worth? Or, put another way — are you paying much more for the painting you covet than the price at which the artist painted it?

At the root of art is the artist’s product that, let us presume for the sake of this column, is an oil on canvas by a reasonably well-known artist, say, J Swaminathan. How is a painting by Swaminathan likely to be priced, and how do you know whether you are paying the right price or more?

Convention has it that the value of an artist’s work usually includes the commission paid by the buyer to a gallery. Therefore, say, if the Swaminathan painting in question is worth Rs 50 lakh, you will know that this is what you will pay to the artist inclusive of the gallery’s commission, though you will still have to pay 12.5 per cent over and above this as Value Added Tax or VAT.

Collectors do not like to pay any more than they absolutely must when it comes to buying art, which is why many of them like to strike deals directly with artists. That way they do not have to pay the gallery commission and sometimes also avoid paying VAT, in which case, of course, they do not get the full papers for a painting, which are required for everything from provenance to insurance valuation. But what the heck, it’s a lot of value saved, particularly if you’re in it for collecting for personal satisfaction, not for selling either now or later.

Fortunately, mindsets are changing so, increasingly, collectors don’t mind paying a little more for works so long as they get the complete paperwork, which is why they’re happy to deal with galleries — but they do negotiate with them. Since the artist’s price is usually fixed, and the VAT is fixed by value, there are two ways they can get away by paying less. One, they make part of the payment in cash and therefore undervoice the painting, so less VAT has to be paid. Two, they negotiate somewhat fiercely with the gallery and get it to reduce its commission, thereby saving themselves a fair bit on the price.

Galleries usually charge a third of the price of the painting as their commission. Thirty-three per cent might seem steep to you for what might appear to be nothing more than leveraging the role of a middleman, but the gallery takes on the onus and expenses of a great many things — printing a catalogue (though young artists allege they are sometimes asked to pay the cost of the catalogue fully or partially), marketing and press coverage, gallery hire charges, recurring expenses such as power and staff, and so on. They are also bridge-builders between the buyer and the seller, and this role is important and stretches long beyond the duration of an exhibition.

A wide swathe of gallerists I spoke with said that they do offer discounts to collectors — first-timers to hook them, old collectors to keep them leveraged — and therefore commissions can be flexible. While in the case of young artists, because of the effort involved in positioning them, it could be higher, at 40 and even 45 per cent, in the case of most galleries and artists of the vintage and calibre of Swaminathan, the commission is more likely to be between 15 and 30 per cent, and is usually between 20 and 25 per cent.

Of course, if you think the 12.5 per cent VAT is unfair, there’s a solution to avoid pay — then have to make your purchases in Kolkata, where VAT is not levied on art because it is clubbed with handicrafts. A 12.5 per cent saving on a Rs 50 lakh Swaminathan painting is considerable, so it’s a wonder that more galleries haven’t opened branches in Kolkata to leverage the price advantage for their buyers — something that galleries and auction houses in that city automatically enjoy.

Auctions are an altogether different ball game. Not only do you not know how the final price will settle despite the indicative estimates, it’s also easy to get carried away in your excitement. Let us say the same Swaminathan estimated at Rs 40-50 lakh has moved up the scale and the final bid is at Rs 55 lakh. Should you bid for it at Rs 58 lakh? Before you do, it is wise to remind yourself that while the competitive bidding might appear transparent, there are several hidden costs that will add hugely to the price you are putting on its value.

Fee levies at an auction house are usually 20 per cent as buyer’s premium. So what you are charged, if your Rs 58 lakh bid is successful, is Rs 58 lakh hammer price + Rs 11.6 lakh buyer’s premium. If that hurts, there’s still more pain — the two state levies are still steep: 12.5 per cent as VAT, and 12.36 per cent as service charge calculated on the value of the buyer’s premium. While this additional 35 per cent (approximately) is explained in the auction documents, it is easy to get carried away and rue the final cost that accrues, so you must keep your wits about yourself in more ways than one when you bid at an auction if you are not to make a foolishly expensive purchase.

An auction, therefore, is a great place to buy a work of rarity, or a missing link in your collection. A gallery is better because there will be no price upsets, and because you have a better handle on the final price and even a degree of flexibility. Too bad about the cess though — and maybe it’s time to speak to those galleries in Kolkata…


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