After India hiked the customs duty on the import of gold earlier this month, there are fears of a possible rise in illegal import of gold in Nepal for the purpose of smuggling the yellow metal to India.

As the country has been witnessing a continuous decline in foreign exchange reserves, the use of scarce foreign currency to fund illegal gold imports could make the ongoing government efforts at conserving foreign exchange futile, officials and experts said.

The Indian government on July 1 hiked the customs duty on gold to 12.5 percent from 7.5 percent per 10 grams. Gold also attracts a 2.5 percent agriculture infrastructure development cess in India, taking the total import duty to 15 percent.

The steps were taken to control gold imports and the widening current account deficit, according to the government.

Nepal is also facing a growing current account deficit due to rising imports, limited exports, and prolonged decline in remittances, although remittance inflow has slightly improved of late.

Nepal registered a current account deficit of $4.96 billion during the first 11 months of the last fiscal year, up from $2.54 billion, according to the central bank. Likewise, foreign exchange reserves declined by 19.6 percent to $9.45 billion in mid-June 2022 from $11.75 billion in mid-July 2021, the central bank said. Decreasing foreign exchange reserves have raised alarm if the country is headed in the direction of Sri Lanka.

“If we don’t increase duties on gold to maintain parity in the price with India, it may lead to a rise in smuggling of gold to India via Nepal,” said Prakash Kumar Shrestha, chief of the economic research division at the Nepal Rastra Bank. “There is the possibility that the money earned by Nepali migrant workers in Gulf countries could be used to smuggle in gold and this will dent the inflow of remittances.”

Nepali authorities have long been blaming the growing trend of smugglers collecting earnings of Nepali migrant workers abroad and using such funds to smuggle gold. This, according to officials, has contributed to ongoing decline in remittances.

While cases of smuggling of gold in large quantities are reported in the media from time to time, officials said there is a growing tendency among smugglers of using migrant workers to import gold in small quantities to evade taxes. The smugglers then collect the gold from migrant workers and smuggle it to India.

“As the price of gold has risen in India due to the hike in customs duty, smugglers will seek to take advantage of this situation,” said Shrestha.

Nepal imposes a customs duty of Rs8,500 per 10 grams of gold. After a hike in customs duty by India along with additional duty for agriculture infrastructure development, the price of gold in India will increase, which officials say could lead to growth in smuggling via Nepal.

On Thursday, the price of hallmark gold per 10 grams stood at Rs79735, according to the Federation of Nepal Gold and Silver Dealers’ Association.

India imposing 15 percent duty means, the southern neighbour imposes a duty of Rs12,063 per 10 grams against Nepal’s Rs8,500 per 10 grams. This price difference means smugglers will try to benefit from the Indian market, which is the second largest gold consumer in the world, according to officials.

Considering the current account deficit and declining foreign exchange reserves, Nepal has been taking steps to discourage the import of gold in recent months. In early March, Nepal Rastra Bank allowed banks to import gold up to 10 kg a day, down from 20 kg a day earlier.

The central bank has taken the move citing declining foreign currency reserves amid a whopping increase in imports. Only commercial banks are legally allowed to import gold in Nepal.

Nepalis can also bring a limited quantity of gold with them in the form of jewellery.

In a notice issued in November last year, the Department of Customs made it clear that people returning from abroad can bring with them up to 50 grams of gold in the form of jewellery which would be non-taxable. Anyone carrying more jewellery—up to 200 grams—needs to pay tax for the gold in excess of 50 grams, according to the department. But gold jewellery weighing more than 200 grams is confiscated, the department said.

Likewise, people are allowed to bring up to 100 grams of gold in bullion by paying taxes.

The Customs Department had started seizing gold jewellery brought by people in excess of 200 grams claiming that people started misusing the concession.

“In the last fiscal year 2021-22, we seized 480 kg of gold for taxation purposes for the import of above 50gm,” said Mahesh Bhattarai, chief of customs office, Tribhuvan International Airport. “More than 50 kg of smuggled gold was also seized in the last fiscal year.”

He said that higher duty imposed by India on gold import could encourage smuggling of gold through Nepal.

During the first 11 months of the last fiscal year 2021-22, Nepal imported gold worth Rs39.31 billion, a rise of 85.4 percent on a year-on-year basis, according to the Nepal Rastra Bank. Likewise, the country imported silver worth Rs13.76 billion during the same period, a rise of 94.8 percent on a year-on-year basis, according to the central bank.

Amid the rising import of silver, the government last year increased the customs duty on silver to Rs107 per 10 grams, up from Rs84 per 10 grams.

According to a senior official of the customs department, they are discussing hiking the customs duty on gold amid smuggling fears.

“The Finance Ministry is doing the necessary homework to hike duty on the import of gold,” said a senior official of the customs department. “After the Indian hike, it is necessary for Nepal also to hike the duties on gold imports to discourage smuggling.”