KATHMANDU: After India significantly reduced the customs duty on gold and silver, there is pressure on the Government of Nepal to adjust the rates accordingly. The reduction has made gold and silver much cheaper in India compared to Nepal, compelling the Government of Nepal to consider following New Delhi’s example.

Presenting the budget for the next fiscal year, Indian Finance Minister Nirmala Sitharaman reduced the customs duty on gold and silver imports from 15 percent to 6 percent. Conversely, the Government of Nepal announced the budget for FY 2024/25 on May 28 and increased the customs duty on gold imports from 15 percent to 20 percent. Currently, importing gold in Nepal incurs a 20 percent customs duty, while importing silver incurs a 15 percent customs duty.

Nepal's policy aims to increase the price of gold jewelry by raising the customs duty on gold imports, whereas India aims to reduce the price of gold and silver jewelry by lowering the customs duty. Gold and silver traders claim this disparity has heightened the risk of unauthorized imports through the open border.

Previously, the Indian government had increased the customs duty on gold and silver imports on January 22, raising it from 10 percent to 15 percent due to a trade deficit caused by high rates of gold imports. Six months later, they reduced the duty by 9 percentage points.

Mani Ratna Shakya, founding president of the Nepal Gold and Silver Dealers Federation, states that India's latest policy necessitates an immediate reduction in Nepal's customs duties. According to him, after India's reduction, raw gold will be cheaper in India by more than Rs 12,000 per tola (11.66 grams) and silver by more than Rs 200 per tola compared to Nepal. "Nepali customers will definitely be attracted to India when cheap gold and silver are available there," he told New Business Age.

Teja Ratna Shakya, former president of the federation, mentions that Nepal has failed to adjust customs duties on gold and silver in a timely manner. "There is a problem because there is no change in policy," Shakya told New Business Age, "The tax should not have been increased in the recently-announced budget."

 He indicated that due to the increase in customs duty, silver is being smuggled from India to Nepal. Shakya said that the federation will urge the Finance Minister to reduce the customs duty.

According to Shakya, the tariff rate on gold and silver imports should be stabilized. "If we want to protect the Nepali market, a 10 percent customs duty should be imposed per 10 grams," he said.

Tax expert Dr. Chandramani Adhikari believes India's reduction in the tax on gold and silver aims to control smuggling from China through Nepal. "Demand was increasing in India and therefore gold was being smuggled. So they tried to control it by reducing tariff," he told New Business Age.

He asserts that if India reduces the customs duty on gold and silver, smuggling from various countries through Nepal to India will decrease. Since India is a large market, a substantial amount of Nepalese foreign currency is spent when smuggling occurs. Nepal Rastra Bank suspects that smugglers are using remittances sent by Nepalis abroad to buy gold, which is then smuggled to India. The central bank has previously attributed the decline in Nepal's foreign exchange reserves to gold smuggling and high imports. Consequently, the government banned the import of certain items and imposed restrictions on gold imports two years ago.

Gold and silver traders argue that when gold is expensive, domestic customers may go to India to buy jewelry, potentially drying up the business in Nepal. According to the Federation of Nepal Gold and Silver Dealers Association, gold was traded at Rs 146,300 per tola on Tuesday.

The Department of Customs reports that gold worth Rs 23.65 billion was imported into Nepal in the last fiscal year, FY 2023/24. Economists warn that since prices in India are lower than in Nepal, there is a risk of gold smuggling from India.

An economist stated that the government should be vigilant in monitoring and controlling smuggling. Tax experts emphasize that the Ministry of Finance and the central bank should take appropriate measures after a detailed study of the differences in customs duties between the two countries.

A high-ranking official of the Revenue Division of the Ministry of Finance indicated that a study on the customs duties reduced by India and the rates charged in Nepal has been prepared. "After the study, the customs duty rate may be revised," said the official, adding that the Ministry of Finance plans to discuss immediate options with businessmen soon.