New budget policies have raised concerns among traders that residents of Nepal’s Terai border areas may stop purchasing gold in the domestic market.
Following the budget announcement, gold prices in Nepal have surged by approximately NPR 20,000 per tola.
Traders had been demanding an increase in customs duties similar to India’s recent hike, but they are now complaining that the government’s increase has exceeded expectations.
What Happened Recently?
Two weeks ago, the Indian government unexpectedly doubled the customs duty on gold. To reduce the trade deficit and foreign currency shortages, Prime Minister Narendra Modi urged citizens to reduce gold consumption, increasing the customs duty from 6% to 15%.
Since gold became more expensive in India, and Nepal’s customs duty remained lower, traders feared a surge in smuggling. Consequently, calls were made to increase Nepal’s customs rates.
However, the government set Nepal’s gold customs duty at 20% in the budget.
This has sparked fresh concerns among traders.
Reuters
-
1%Importer banks and wholesale dealers pay a 0.5% / 0.5% margin
-
0.5%Skill development charge introduced in this year’s budget
-
25 kgDaily gold import limit set by Nepal Rastra Bank
-
NPR 2.531 billionValue of imported gold from mid-July to mid-March
“We had been advocating for customs duty similar to India’s, but now, with a 5% higher duty, consumers in border areas may shift to buying gold from Indian markets, which would cause significant losses for us,” said Arjun Rasaili, President of the Nepal Gold and Silver Traders Association.
According to him, India imposes a 15% customs duty plus 3% GST on gold, whereas Nepal now has a 20% customs duty along with a 1% margin for banks and traders. Last year’s luxury tax was removed, but a 0.5% skill development charge was newly introduced this year.
Severe Impact on Border Area Markets
“Even small savings incentivize people to buy from India’s open border markets, making smuggling easier,” Rasaili explained.
Jewelry businesses in border areas warn they will face serious challenges if customs rates are not adjusted promptly.
“With a price difference of NPR 15,000 to 20,000 per tola, Nepali buyers will prefer Indian markets, just like those who used to buy sugar for a few rupees saving,” stated Ramji Shah, Chairman of the Madhesh Committee.
This week, gold prices in Nepal have exceeded NPR 310,000 per tola.
The Indian Bullion and Jewellers Association reports gold prices in India hover around NPR 300,000 per tola, varying by state due to differing tax rates and transportation costs.
What Is the Impact on Gold Demand?
Image source, RSS
Since early 2023, gold prices have been rising steadily on the international market.
Prices had climbed continuously over the past years, reaching around NPR 310,000 per tola earlier this year.
According to Rasaili, domestic gold demand has declined by 60 to 65 percent due to rising prices.
Following India’s customs increase two weeks ago, internal demand reportedly dropped by up to 70% there.
“Similar effects could occur here in Nepal,” Rasaili added.
Nepal Rastra Bank currently imposes a daily gold import limit of 25 kilograms and reports that roughly NPR 25 billion worth of gold was imported in the first nine months of the current fiscal year.
While the increase in customs duties is being debated, economists suggest that the government should carefully manage gold pricing.
“Gold prices are closely linked to foreign currency reserves. If gold becomes cheaper in Nepal, it could result in a foreign currency reserve deficit when crossing to India, a situation we cannot afford,” said economist Narbahadur Thapa.
“If gold becomes more expensive in Nepal, cross-border purchases will increase, harming the jewelry industry. Therefore, prices must be balanced and not diverge significantly from Indian prices.”
The Gold and Silver Traders Association has stated it will soon formally communicate its views to the Ministry of Finance on this matter.
Trader Ramji Shah emphasized the need for immediate response, saying, “Customs duties should be adjusted and the skill development charge introduced in the budget should be removed.”
The issue of gold customs duties was a topic of debate after last year’s budget as well, particularly when the government imposed a 2% luxury tax, which faced opposition.
