Nepal's increased bullion import duty to help India reduce smuggling

Smuggling of gold via Nepal borders was not only affecting India but also Nepalese jewellers

The Nepal government’s decision to sharply increase import duty of gold and silver is expected to help both Nepal and India, as part of the volume imported by Nepalese jewellers enters India illegally, significantly squeezing their supplies.

The government of Nepal, which shares a porous border with India, had last week increased Customs duty on import of up to 50 gm of gold bars to Nepalese rupee (NPR) 7,500 per 10 gm — up from NPR 6,200 per 10 gm earlier. For import of 51-100 gm of gold bars, the duty was raised to NPR 8,500 from NPR 7,200 per 10 gm. For any quantity above 100 gm, the duty was fixed at NPR 10,000 per 10 gm, against NPR 8,500 earlier.

Nepal has a mechanism where gold is imported by its apex association of jewellers on a quota basis — not more than 20 kg a day. Besides, the country’s central bank, Nepal Rashtra Bank (NRB), allows commercial banks to import 20kg a day. During periods of increased demand, this quota can be increased by 5 kg a day.

However, jewellers’ daily requirement for meeting local demand is 40-50 kg gold per day. Since a part of their daily import quota slipped into India through unofficial routes, Nepalese jewellers’ supplies were squeezed further.

Chirag Sheth, a senior consultant at Metal Focus, says: “The Nepal government’s primary motive seems to be curbing the rising unofficial flows into India since the duty differential widened after July this year. The Nepalese currency is pegged to the Indian rupee. The authorities there were worried about the negative impact of rising gold imports (partly for smuggling to India) on Nepal’s current account.”

Huge quantities of gold were being unofficially brought into Nepal from China, and part of that was finding its way into India. Going by official estimates, only half of their gold requirement was reaching Nepalese jewellers.

From India’s point of view, the move is significant because the country has also seen a sharp jump in gold smuggling, especially since it raised the import duty on gold to 12.5 per cent in July this year. Last year, India was estimated to have received over 100 tonnes of smuggled gold. In the four months since July, thanks to a sharp jump in prices, gold import has been around 120 tonnes — only 30-35 per cent of that for domestic consumption. Reduced demand has also hit smuggling in absolute terms.

Nepal last week also increased import duty on silver from NPR 56 per 10 gram to NPR 75 per 10g.

After India’s July decision of increasing import duty on precious metals to 12.5 per cent, the duty differential between the two countries had widened. Based on the revised duty rates and the prevailing gold prices in Nepal, the current duty is effectively between 10.5 per cent and 11.5 per cent in that country. However, following Nepal’s duty hike, gold demand there is also expected to fall in line with the decline seen in India.